Bear of the Day: H&E Equipment Services, Inc.

H&E Equipment Services, Inc. HEES is one of the largest rental equipment companies in the U.S. H&E Equipment has been on an impressive run of growth, driven by surging construction across multiple segments of the U.S. economy.

HEES is coming under some pressure amid a "transitioning business environment." H&E Equipment fell short of our bottom lines estimate on April 30 and provided downbeat earnings guidance that helps it grab a Zacks Rank #5 (Strong Sell) at the moment.

H&E Equipment Overview

H&E Equipment rents, sells, and provides parts and services across a range of rental equipment of all shapes that are utilized throughout the entire construction sector. HEES has expanded in a critical part of the wider construction sector through organic growth and acquisitions. The company closed its purchase of Precision Rental in the first week of 2024 and acquired Montana-based Lewistown Rental on May 1. H&E Equipment now boasts 145 branch locations across 30 states.

H&E Equipment grew its sales by roughly 18% in the last two years, driven by a wave of residential building, commercial construction, and infrastructure spending. HEES is still projected to grow its sales by another 8% in 2024 and 6% next year. Construction remains sturdy overall, but HEES is prepared for "moderating growth levels compared to the exceptional rate of growth in construction spending and strong business dynamics."

"We believe the easing in the progression of construction spending is in part the result of a 'higher for longer' interest rate environment and generally tighter lending standards, which have contributed to a greater supply of rental equipment" CEO Brad Barber said in prepared Q1 remarks.

H&E Equipment's FY24 and FY25 earnings estimates have fallen by 19% and 15%, respectively since its report at the end of April. The recent downward revisions washed away a year's worth of positive EPS momentum for HEES, with its FY24 consensus 4% lower than it was 12 months ago. HEES is now expected to see its adjusted earnings fall by 15% YoY in 2024.

Bottom Line

H&E Equipment stock tumbled following its release, yet it is still up 40% over the last year. That said, HEES shares have gone on a wild ride during the last decade, experiencing far more volatility than the Zacks Industrial sector.

HEES appears to be finding some support at its 50-week moving average. But investors might want to stay away from H&E Equipment stock for now as the U.S. economy and the construction sector cool.  

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