After a Nice Run, Does H&E Equipment Have More Upside?

Like the rest of the equipment-rental industry, H&E Equipment Services (NASDAQ: HEES  ) has been riding a rebound in demand from the construction sector, delivering a strong double-digit stock price gain over the past year. It has also benefited from a reduced number of competitors at the top, courtesy of last year's merger between mega industry players United Rentals (NYSE: URI  ) and RSC. 

H&E is also shareholder-friendly, returning significant capital to shareholders through a large special dividend in 2012. So, should new investors bet on this small cap?

What's the value?
H&E's combination with fellow regional player ICM Equipment in 2002 provided the company with a solid foundation and national footprint, including strong positions in the Gulf Coast and Intermountain regions. From that base, H&E has been gradually filling out its market exposures, owning 68 facilities as of September. 

Unlike its larger competitors, though, the company's business mix includes a relatively large new-equipment-sales operation that it uses to create downstream sales opportunities in the parts and services areas.

In fiscal year 2013, H&E reported solid top-line growth, up 24%, aided by a positive pricing environment and selective additions to its store network. Despite a double-digit year-over-year increase in the size of its rental fleet, the company's overall fleet time utilization remained above 65%, indicating strong end-user demand from its primarily construction-related customer base. 

The net result has been rising profitability and operating cash flow generation, capable of funding future increases in both its network and rental fleet.

Going head to head
Of course, H&E's growth ambitions will increasingly put it in head-to-head competition with United Rentals, the country's largest equipment-rental company. United nearly doubled its size with last year's acquisition of leading competitor RSC, offering rental services through more than 800 locations across the U.S. and Canada as of September. 

It uses its large size to its advantage in its continuous quest for operating efficiencies, generating an adjusted operating margin above 20% versus roughly 11% for its smaller competitor.

In fiscal year 2013, United similarly posted a top-line increase, up 26.1%, boosted by both its acquisition of RSC and a solid gain in average product pricing. Unlike H&E, though, United generates the vast majority of its revenue from rental services, utilizing sales operations mainly as a conduit for end-of-life disposal of its used fleet. 

The company's focus on the rental market as well as its strategy of pursuing large national accounts has produced a strong and improving profitability level, providing ample funds for the management of its acquisition debt and further increases in its rental fleet.

Also on the competitive-threat list is rental giant Hertz Global  (NYSE: HTZ  ) , which has been participating in the equipment-rental segment since 1965. While the company's network of roughly 340 locations pales in comparison to industry leader United's operating base, Hertz's global scale allows it to operate in a greater variety of key international markets, like China and Australia.

Not surprisingly, Hertz's equipment-rental unit has also posted a solid operating performance in fiscal year 2013, with a 13.7% increase in revenue and a strong pickup in profitability. While the unit has only been marginally increasing its domestic network lately, it has found better opportunities internationally and through diversification initiatives, including a recent purchase of Cinelease, a major provider of lighting and grip rentals to the entertainment industry. 

In addition, the unit has benefited from its parent company's improving financial results, which have been bolstered by a strong car-rental business and the effects of the 2012 blockbuster purchase of the Dollar Thrifty car-rental chain.

The bottom line
Domestic construction activity has enjoyed solid growth in 2013, with the American Institute of Architects forecasting a 5% increase in commercial construction activity for the full year and further increases in 2014.  Assuming the forecasts bear out, H&E appears well positioned as a primary beneficiary of the higher activity level, and it should be able to generate further profit growth over the next year. 

While United Rentals and Hertz's rental units are formidable competitive threats, given their size and scale advantage, the current favorable industry pricing seems to indicate that end-user demand is strong enough to lift all boats. As such, H&E is an intriguing play for investors in the rental space.

Don't wait -- start investing today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2753797, ~/Articles/ArticleHandler.aspx, 10/24/2014 4:57:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement