H&E Equipment Services Up on Earnings Beat - Analyst Blog

Shares of H&E Equipment Services Inc. HEES gained more than 24% after posting a 32% year-on-year improvement in its fourth-quarter 2013 earnings to 41 cents per share on Feb 28. The results outperformed the Zacks Consensus Estimate by a penny. Earnings improved on the back of solid demand for rental equipment and strong utilization.

Total revenue increased 3.8% to $260 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $277 million. The year-over-year rise was driven by strong performance in the rental and used equipment businesses. Rental revenues rose 12% year over year to $90.4 million on the back of higher rates and a larger fleet.

However, new equipment sales declined 10.6% to $77.8 million, was primarily due to lower demands for large cranes. Used equipment sales increased 28.9% to $38 million attributable to higher crane and earthmoving sales. Parts sales dropped 1% to $25.2 million. Service revenues also fell 2% to $14.6 million from the prior-year quarter.

Cost and Margins
 
Cost of sales was $177.9 million in the quarter, compared with $176.6 million in the year-earlier quarter. Gross profit moved up 11% to $81.6 million. Consequently, gross margin expanded 210 basis points to 31.5%. Rental gross margins increased to 48.9% in the quarter from 48.1% in the prior-year quarter due to higher average rental rates on new contracts, strong fleet utilization and lower rental expenses as a percentage of equipment rental revenues. Rental rates were up 5.6% from the year-ago period rates.
 
Gross margins on new equipment sales were 10.7%, down from 11.2% in the year-ago quarter. Gross margins on used equipment sales were 29.7% as against 30.2% a year ago. Gross margins on parts sales increased to 30.2% in the quarter from 27.4% in the prior-year quarter. Gross margins on service revenues were 64% in the reported quarter versus 59.4% as of Dec 31, 2012.
 
Selling, general and administrative expenses increased 8% year over year to $48.7 million. Adjusted operating profit increased 16% to $33 million and operating margin expanded 140 bps to 12.7%. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased 17.5% to $70.9 million. EBITDA margin in the quarter was 27.3%, compared with 24.1% in the year-ago quarter.

Financial Updates
 
H&E Equipment Services ended 2013 with cash and cash equivalents of $17.6 million, up from $8.9 million as of 2012-end. Total debt of the company increased to $734.7 million as of Dec 31, 2013, from $690 million as of Dec 31, 2012.

Fiscal 2013 Performance

For full-year 2013, the company reported adjusted earnings per share of $1.26, up 24.7% from $1.01 in 2012. The results came ahead of the Zacks Consensus Estimate of $1.19.

Revenues for the year 2013 increased 18% year over year to $987 million, surpassing the Zacks Consensus Estimate of $969 million.

Rental Fleet

As of Dec 31, 2013, the original acquisition cost of H&E Equipment Services' rental fleet was $1 billion versus $883 million as of Dec 31, 2012. Dollar utilization was 36.2% compared with 36.4% in the fourth quarter of 2012.
 
Our Take

H&E Equipment Services continues to capitalize on improving market conditions, particularly the growing demand for rental equipment. The company also expects its distribution business to perform well, going forward. The wide range of construction projects will also drive growth.

H&E Equipment Services expects the momentum in its rental and distribution business to continue in 2014. The company will continue to step up its fleet investment during the year, based on the current and expected demand levels. The company is set for market expansion in the industrial markets and in the commercial construction sector. Construction activity in the industrial arenas, particularly the oil patch and petrochemicals industries, is currently at the highest levels seen since the last peak cycle. It is expected to grow further going forward.

Baton Rouge, La.-based H&E Equipment Services rents, sells and provides parts and service support for hi-lift or aerial work platform equipment, crane, earthmoving equipment and industrial lift truck categories. It offers heavy construction and industrial equipment for rent on a daily, weekly and monthly basis.

H&E Equipment Services Inc. currently has a Zacks Rank #3 (Hold).
 
Some better-ranked stocks in the same sector include The Manitowoc Co., Inc. MTW and Komatsu Ltd. (KMTUY). While The Manitowoc sports a Zacks Rank #1 (Strong Buy), Komatsu has a Zacks Rank #2 (Buy).

Peer Performance
 
Among H&E Equipment's peers, construction and mining equipment behemoth Caterpillar Inc. CAT recorded a 5% rise in its fourth-quarter 2013 earnings to $1.54 per share, aided by prudent cost reduction. Results outperformed the Zacks Consensus Estimate of $1.29.