Essex Rental Corp (ESSX) is a market leader in the heavy crane rental industry. The company primarily rents (78% of fleet) crawler cranes used in heavy construction projects such as infrastructure, power generation, petrochemical, and other heavy industrial projects in North America.
The rental industry companies have seen huge moves in their stock prices over the last 6 months. This was fueled by a demand for smaller equipment rentals as companies preferred the flexibility of renting over purchasing equipment in a lukewarm economic recovery. The value of these companies was confirmed when United Rentals (URI) purchased RSC Holdings (RRR) for a 58% premium in December. Since that purchase United Rentals' stock is up 40% itself.
URI and RRR are both focused on lighter construction/industrial equipment as well as earth moving equipment. Traditionally, lighter equipment is needed first in a recovery as businesses start to grow. The natural progression of equipment needs starts with the lightest pieces, then to earth moving equipment, and then to heavy construction equipment.
Essex's asset base is made up of all lifting equipment, the last to feel the uplift of an economic recovery. Company management, in a January presentation at the CJS Securities Conference (pdf), said they believed that 2011 was the bottom for the heavy construction rental cycle. Lifting equipment usually lags the recovery in light equipment/earth moving by 6 to 12 months. If an investor believes management is correct and using the light equipment rental companies reversal in August- September as a proxy; Essex's business should be approaching an inflection point.
The company expects to see year-over-year and sequential growth throughout 2012 in both rental rates and utilization. The addition of assets purchased from a bankrupt firm, Coastal Crane, in December of 2010 will also fuel top line growth. If the fragile economic recovery continues, history says Essex will likely feel the same updraft of their lighter equipment counterparts.
The orderly liquidation value (OLV) of the company's assets was $350 million as of 9/30/11 (appraisal done by a 3rd party appraiser). With an average lifespan for the company's crawler cranes at over 50 years, the OLV is a good metric to value the bare minimum value of the company. If the total company debt ($218.9 million) is subtracted from the OLV shareholders are left with a net tangible asset value of $131.1 million or $5.37 a share. If the company's cash is added back in, the value is nearly $6.
With the consolidation of the industry likely to continue into 2012, Essex's stock is undervalued trading at roughly one-half of the asset value. On February 14, 2012 two large open market transactions of 100,000 and 143,000 shares crossed the tape at $2.84 and $2.82 respectively in quick succession. The average daily volume of the stock is 64,000 according to Yahoo Finance. This is indicative of institutional buyers stepping into the market for Essex's stock. The stock has rallied nearly 20% since those two transactions.
The combination of industry consolidation, an undervalued company based on tangible assets value, and the presence of institutional buyers has Essex's stock poised to make a move back toward the 2011 highs of over $7.00 per share.
Disclosure: I am long ESSX.
Disclaimer: I receive no compensation to write about any specific stock, sector or theme.