London Company Buys McGrath RentCorp, Citing 20% ROIC

The London Company initiated a position in McGrath RentCorp (NASDAQ:MGRC) in the second quarter, arguing the business-to-business specialty rental company generates returns on invested capital above 20% while the market underappreciates its earnings power. The initiation was disclosed in the firm's Q2 2026 investor letter for its Small Cap Strategy.

The stock closed at $111.76 on September 21, 2026. Shares declined 2.59% over the past month and are down 6.43% over the past year. McGrath RentCorp carries a market capitalization of $2.73 billion and has traded within a 52-week range of $94.99 to $125.83.

The letter lays out the investment case in detail. MGRC operates across modular buildings, portable storage, and electronic test equipment. It serves commercial, education, healthcare, and data center customers through a primarily recurring rental model.

Education is the anchor. The segment represents roughly one third of revenue and provides stable, longer-duration leases funded through state and local bond measures. According to the letter, MGRC has organically grown market share from approximately 4% to 14%. The company maintains a conservatively financed balance sheet that supports organic growth, tuck-in acquisitions, and capital return.

The London Company also points to regional scale advantages, including deep fleet availability, internal maintenance capabilities, and regulatory expertise. These allow MGRC to compete effectively on complex, higher-value projects where reliability and timely installation matter more than being the lowest-cost provider.

"We believe the market underappreciates MGRC's resilient cash flow profile, internally driven growth opportunities, and long-term earnings power," the letter states.

The position came during a strong but uneven quarter for U.S. equities. Markets rebounded on AI infrastructure spending and positive earnings, though rate outlook uncertainty persisted, according to the letter. Technology, previously weak, surged to lead the market — especially semiconductors — while energy declined as oil prices fell. Small caps outperformed large caps, with momentum and volatility factors leading; quality and yield acted as headwinds for portfolios.

The London Company Small Cap portfolio increased 12.9% during the quarter, underperforming the Russell 2000 Index's 21.5% gain, primarily due to stock selection issues. The firm says it remains confident in durable, high-quality businesses for attractive long-term compounding.

The McGrath thesis carries a clear catalyst: the letter notes that an eventual recovery in commercial construction would provide additional upside through higher utilization and operating leverage.