United Rental, H&E Equipment Cut By KeyBanc On 'Softer' Rental Environment

In a report published Wednesday, KeyBanc Capital Markets analyst Joe Box downgraded the ratings on H&E Equipment Services, Inc. HEES and United Rentals, Inc. URI from Overweight to Sector Weight, citing the recent channel checks that “increasingly” point toward “a compressed equipment rental year.”

In the report KeyBanc Capital Markets noted the factors that have resulted in a slower-than-expected ramp in seasonal construction activity:

1. Inclement weather in certain regions
2. Low GDP/macro concerns in 1Q
3. Select construction labor shortages
4. Continued oil and gas headwinds

“Given the headwinds experienced during the critical ramp season, we suspect that construction activity this year could be compressed into a tighter window (~5-6 months vs. normal 8-9 months) and equipment rental firms may not recoup rental rate/utilization losses from earlier in the year,” analyst Joe Box wrote.

While saying that 2016 “could be a better year” than 2015 for the equipment rental group, Box said he believed investors “could begin to question equipment rental earnings growth potential beyond 2016, and as such, may begin to look toward late-cycle valuation for the group.” With this, multiple compression may “outweigh” any improvement in fundamentals.

H&E Equipment’s EPS estimates for 2015 and 2016 have been reduced from $1.62 to $1.43 and from $1.98 to $1.67, respectively. United Rentals’ EPS estimates for 2015 and 2016 have been reduced from $8.63 to $8.28 and from $9.85 to $9.10, respectively.