H&E Equipment: Recent Performance Indicates Upside Potential

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Whether for personal or professional use, it is often better to rent equipment than to buy it. In addition to the tax implications, you also have the fact that certain equipment is not needed on a regularly. So, instead of incurring a high cost to buy something for infrequent use, you pay a much lower fee for the periodic use of it. One of the leading companies in the equipment rental space is H&E Equipment Services (NASDAQ: HEES). Over the past few years, largely but not entirely due to the COVID-19 pandemic, this company has had a bit of a bumpy ride. But overall, the fundamentals are solid and its financial situation appears to be improving now that we enter fiscal 2022. Add how cheap stocks are and that should provide an attractive long-term outlook for investors. patient investors.

Fun equipment rental

According to H&E Equipment Services’ management team, the company is one of the largest equipment rental companies in the United States. Operationally, the company generates revenue from a few different sources. The main contributor to its sales is the rental of various equipment such as aerial work platforms, earthmoving equipment, general equipment such as air compressors and industrial trucks, and material handling equipment such as forklifts, telehandlers, etc. In the company’s 2021 fiscal year, this particular set of operations accounted for 69% of the company’s revenue and an impressive 76% of its gross profit. The company rents this equipment and provides its other services, which will be mentioned shortly, through the 102 branches it operates in 24 different states. And to put into context how big the company is, its current portfolio includes 42,725 pieces of equipment and at an average age of less than 3.5 years.

H&E Equipment Service Sales

H&E Equipment Services

Of course, there are other operations that are important to the business. For example, the company sells some of its used equipment to customers. This helps the company to monetize old machines with the aim of recycling capital. This set of operations accounted for 13% of the company’s revenue and 12% of its profits last year. The company also sells new equipment through a professional in-house retail force. This set of operations accounted for 9% of revenues and 3% of profits last year. Parts sales made both to the company’s rental fleet and to external customers represent 6% of sales and 4% of profits. In addition to this, the company also provides maintenance and repair services, both for its own fleet and for the customers to whom it sells equipment. This particular set of operations accounted for 3% of revenue and 5% of profit last year.

H&E Equipment Services Historical Financial Data

Author – SEC EDGAR Data

Over the past few years, the financial performance of H&E Equipment Services has been rather lackluster. After seeing its revenue fall from $1.03 billion in 2017 to $1.24 billion in 2018, it then began a steady decline, falling to $1.01 billion in 2020. The good news for investors is that the company saw a slight improvement in 2021, with revenue up. at $1.06 billion for the year. With regard to profitability, the situation was also rather volatile. Net income fell year over year between 2017 and 2020, from $109.7 million to minus $46.4 million. However, in 2021, the company generated a profit of $60.6 million. Operating cash flow followed another trend. In the three years ending in 2019, it grew year over year, from $226.2 million to $319.2 million. In 2020, it was less than $286 million, while in 2021, it totaled $259.6 million. If, however, we correct for changes in working capital, the situation is a little better. After peaking at $375.5 million in 2019, it dipped to $296.2 million in 2020 before rising to $316.6 million last year. A similar trend can be seen when looking at EBITDA. It ultimately rose from $359.4 million in 2020, after falling from $473.2 million a year earlier, to $394.3 million last year.

HEES Q1 2022 Financials

Author – SEC EDGAR Data

Financial performance continues to improve now that we are in fiscal 2022. Last quarter sales were $272.5 million. That’s 13.4% more than the $240.4 million reported for the first quarter of 2021. This is particularly noteworthy considering that last October the company completed the sale of its business. cranes in exchange for $130 million. The company therefore managed to continue its growth even by selling one of its assets. As revenues increased, profitability also increased. Net income for the last quarter was $16.3 million. This eclipses the $1.9 million generated a year earlier. Operating cash flow decreased from $46.9 million to $38.5 million. But if we adjust for changes in working capital, it would have gone from $61 million to $85.6 million. Meanwhile, the company’s EBITDA fell from $76.9 million to $103.4 million.

Management has not offered any real guidance for the current year. But if we analyze the results observed so far, we should expect net profits of around $85 million. Cash flow from operations, on an adjusted basis, is expected to be around $444.3 million. And EBITDA is expected to total approximately $530.2 million. Now, before we rate the business, I would like to say that even though the business looks very cheap based on cash flow, we have to keep in mind that rental equipment depreciates quickly. Thus, the company must continue to provide the cash necessary to reconstitute and optimize its portfolio of assets. So while I consider company cash flow metrics to be very important, perhaps the best way to value the company is from a price-earnings approach.

HEES stock market multiples

Author – SEC EDGAR Data

Taking this approach, using our 2021 results, the company is trading at a price/earnings multiple of 21. The price/operating cash flow multiple is considerably less than 4, while the EV/EBITDA multiple is 5.5. If we instead value the company using 2022 estimates, those multiples are lower at 14.9, 2.9, and 4.1, respectively. To put this pricing into perspective, I decided to compare the company to three similar companies. On a price/earnings basis, using our 2021 results, H&E Equipment Services ended up being more expensive than two of the three companies, with all three companies trading in a range between 8.8 and 22.3. Using the price/operating cash flow approach, the range was 5.1 to 10.2. Based on this, our prospect was the cheapest of the bunch. Meanwhile, using the EV to EBITDA approach, the range is 5.1 to 9.8. Only one of the three companies was cheaper than our target.

Company Prizes / Earnings Price / Operating Cash EV / EBITDA
H&E Equipment Services 21.0 4.0 5.5
McGrath RentCorp (MGRC) 22.3 10.2 9.8
America (UHAL) 8.8 5.1 5.1
United Rentals (URI) 14.0 5.7 6.8

Carry

Based on the data provided, H&E Equipment Services appears to be recovering. The company’s overall fundamental condition looks solid and the stock looks remarkably cheap in absolute terms and perhaps slightly undervalued compared to similar companies. The price/earnings ratio is a bit high, but you can’t win them all. All things considered, I would rate this company as a buy prospect at this time.

About Joel Simmons

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