Big Company Sets Up a Big Potential Gain
United Rentals, Inc. (NYSE: URI), the equipment rental company jumped. The Street.com reported the gain came “after [the equipment rental company] reveal[ed] adjusted earnings per share hit $3.31. That beat expectations — Zacks consensus was for $3.06 — and was a 15.3% hike over the same time last year.
Total revenue also jumped — by more than 22% — to more than $2.1 billion. Much of that was thanks to rental revenue that rose by 23% to nearly $1.8 billion.
Expressing pleasure with the quarter’s results, Michael Kneeland, chief executive of United Rentals, said in a statement that the company was now entering its “busy season with the strongest service offering in our history.” Strategic investments and recent acquisitions, Kneeland suggested, have prepared the company for the upcoming demand.”
Business Wire reported,
“The company confirmed its 2019 outlook of $9.15 billion to $9.55 billion in total revenue. Michael Kneeland, chief executive officer of United Rentals, said, “We’re pleased with our solid start to 2019, and the broad-based growth we realized across geographies and verticals. …. I’m proud of our team for staying focused on our customers through multiple integrations and the recent weather headwinds.”
Kneeland continued, “By reaffirming our guidance, we’re emphasizing our confidence in the cycle. The year is unfolding as we expected – customer sentiment remains positive, and feedback from the field points to healthy end-market activity. Given our strong competitive advantages, we’re in an ideal position to serve our customers and maximize shareholder value.”
United Rentals, Inc., through its subsidiaries, operates as an equipment rental company. It operates in two segments, General Rentals; and Trench, Power and Fluid Solutions.
The General Rentals segment rents general construction and industrial equipment, including backhoes, skid-steer loaders, forklifts, earthmoving equipment, and material handling equipment; aerial work platforms, such as boom lifts and scissor lifts; and general tools and light equipment comprising pressure washers, water pumps, and power tools.
It serves construction and industrial companies, manufacturers, utilities, municipalities, homeowners, and government entities.
The Trench, Power and Fluid Solutions segment rents specialty construction products that include trench safety equipment, which comprise trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers, and line testing equipment for underground work; and power, as well as heating, ventilating, and air conditioning equipment, including portable diesel generators, electrical distribution equipment, and temperature control equipment.
The company operates a network of approximately 1,186 rental locations in North America and around 11 in Europe.
The jump in the stock could complete a bottoming pattern visible in the longer term chart.
A Trade for Short Term Bulls
As with the ownership of any stock, buying URI could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for URI
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For URI, the June 21 options allow a trader to gain exposure to the stock.
A June 21 $145 call option can be bought for about $4.20 and the June 21 $150 call could be sold for about $2.50. This trade would cost $1.70 to open, or $170 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $170
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in URI the maximum gain is $3.30 ($150 – $145 = $5; $5 – $1.70 = $3.30). This represents $330 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $190 to open this trade.
That is a potential gain of about 94% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.