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Behind McGrath RentCorp's Surprisingly Good Quarter

In the third quarter of 2017, business-to-business rental provider McGrath RentCorp's (NASDAQ: MGRC) business finally started to click. After years of mixed results, generally driven by mobile modular growth but weak sales in telecommunications and the Adler tank business, all three segments showed improvement last quarter. 

Here's a look at the key takeaways from the company's earnings. 

Image source: Getty Images.

McGrath RentCorp: The raw numbers

Metric Q3 2017 Q3 2016 Year-Over-Year Change
Sales $135.4 million  $122.0 million  11% 
Net income $16.8 million  $12.9 million  30.2% 
Diluted EPS $0.69  $0.54  27.8% 

Data source: McGrath RentCorp's Q3 2017 earnings release. EPS = earnings per share.

What happened with McGrath RentCorp this quarter? 

McGrath RentCorp's business is split into diverse segments -- mobile modular, Adler tank rentals, and TRS-RenTelco (telecommunications) -- so it's important to understand what's going on in each business

  • Mobile modular has been the biggest long-term winner, and that streak continued with a 9% climb in rental revenue to $36.2 million and a 25% increase in operating income to $15.8 million. 
  • TRS-RenTelco saw a 3% boost in rental revenue to $21.0 million and a 12% hike in operating income to $7.1 million. 
  • Adler Tanks, which has struggled as oil prices have fallen, had a 17% jump in rental revenue to $16.5 million and operating income jumped 60% to $4.2 million. 
  • Management raised its operating profit guidance from growth of 9%-12% this year to 15%-18% after these strong results. 
  • The dividend increased 2% to $0.26 per share quarterly. 

What management had to say

Results were a little surprising, even to management, but they're not going to make the mistake of increasing equipment capacity because of a short-term bump in demand. CEO Joe Hanna said this in the press release: 

Our third quarter results reflect some improvement in market conditions at Adler Tank Rentals and TRS-RenTelco.  In addition we benefited from the various return on invested capital performance improvement initiatives across the business.  We are also maintaining discipline on new rental equipment capital spending while selectively selling non-core equipment.

High demand and rising margins are good problems to have, but management also realizes that the strength of today's business cycle won't last forever. 

Looking forward

Investment in telecommunications networks and oil and natural gas drilling should help drive results for the foreseeable future. If management can use this business strength to slowly grow the business without adding debt (which was down $3 million in the quarter), it will be a long-term win for investors. For now, the whole business is hitting on all cylinders. 

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends McGrath RentCorp. The Motley Fool has a disclosure policy.