A Covered Call position was established in United Rentals Inc.(URI) when the Covered Calls Advisor's buy/write limit order at a net debit limit price of $308.86 was executed. One hundred shares were purchased at $332.70 and 1 June 9th, 2023 Call option was sold at $23.84 at the $315.00 strike price. The time value was $6.14 per share = [$315.00 strike price - ($332.70 stock purchase price - $23.84 Call option price)]. Given my current cautious stock market outlook, a moderately in-the-money Covered Call position was established with a Delta of 71.6 which approximates a 71.6% probability this position will be in-the-money and therefore assigned on the June 9th, 2023 options expiration date.
Three features of this position are: (1) the next earnings report on July 26th is after the June 9th options expiration date; (2) There is no intervening ex-dividend date prior to the expiration date; and (3) As preferred, the Implied Volatility of this United Rentals Call option of 44.6 when this position was established is substantially above that of VIX which is currently 20.2. This high Implied Volatility provides a good options premium income (which is therefore also accompanied by an attractive potential annualized return-on-investment) from selling this URI Call option.
United Rentals is the largest rental equipment company in the world (two divisions are general rentals and specialty rentals) with annual revenues of $14 billion, a market cap of $23 billion, 25,000 employees, and 1,450 rental locations. Their store network is nearly three times the size of any other provider, with locations in 49 states and all Canadian provinces, and they continue to grow faster than their competitors through a combination of organic growth and tuck-in acquisitions. They have identified five tailwinds that bode well for their continued strong organic growth -- Infrastructure Bill, EV investment, new domestic semiconductor manufacturing, North American LNG infrastructure, and the Inflation Reduction Act (clean energy). CEO Matt Flannery has a strong, experienced top management team all of whom seem to be focused on a company culture of serving people (both customers and employees) as well as on continued financial excellence via a continuing commitment to increasing revenues, return-on-invested-capital margins, and EBITDA. They also continue to demonstrate confidence in their business with shareholder-friendly policies of aggressive share repurchases, debt reduction from their strong cash flow, and beginning this year they established their first quarterly dividend policy at an approximate 1.5% annual dividend yield.
United Rental's valuation is attractive based on a trailing twelve months (through Q1 2023) P/E Ratio of only 10.2 (below their prior 5-year average of 12.0) and their upcoming full FY 2023 EPS are expected to increase by 18.6% and they have beat analysts' quarterly EPS estimates in the Q1 quarter as well as two of the last three prior quarters. In addition, Wall Street analysts' current average target price is $433.22 (+30.2% above today's purchase price).
As detailed below, the potential return-on-investment results for this United Rentals Inc. Covered Call position is +2.0% absolute return (equivalent to +42.6% annualized return-on-investment for the next 17 days) if the stock is assigned on the June 9th options expiration date.
United Rentals Inc.(URI) -- New Covered Call Position
The buy/write transaction was:
5/24/2023 Bought 100 United Rentals shares @ $332.70
5/24/2023 Sold 1 URI 6/9/2023 $315.00 Call option @ $23.84 per share.
A possible overall performance result (including commissions) for this United Rentals Covered Call position are as follows:
Covered Call Net Investment: $30,886.67
= ($332.70 - $23.84) * 100 shares + $.67 commission
Net Profit:
(a) Option Income: +$2,383.33
= ($23.84 * 100 shares) - $.67 commission
(b) Dividend Income (If URI shares assigned at June 9th, 2023 expiration): +$0.00
= ($0.00 dividends per share x 100 shares)
(c) Capital Appreciation (If URI shares assigned at $315.00 strike price at expiration): -$1,770.00
+($315.00 - $332.70) * 100 shares
