Construction Rental Companies Comparison

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Includes: ESSX, HEES, NEFF, URI
by: Michael Manos

Summary

An overview of publicly-traded rental companies.

Brief look at industry tailwinds.

Comparison analysis with the balance sheet in focus.

Industry Overview

America's infrastructure is in need of serious improvements. This past election cycle we saw both political parties agree on this, with Donald Trump and Bernie Sanders sharing the same basic idea that America's infrastructure needs some help. President Obama also agrees, and on December 4th, 2015, he signed the Fixing America's Surface Transportation Act, commonly referred to as the FAST Act. The FAST Act authorized $305 billion of spending over fiscal years 2016-2020 for various infrastructure projects. The Trump Administration has hinted at spending $1 trillion on infrastructure over the next decade. PwC has issued a memo on the matter and says that the spending is "fiscally feasible," and that the public private partnerships trend will likely continue as it has seen bipartisan support. I encourage readers to check out the information provided by PwC, but for those that do not want to get into the details, I think it is logical to speculate that some tailwinds coming for those operating in the industry. This article will look at companies that rent various tractors, cranes, and other pieces of heavy machinery that contractors lease to work on projects. Specifically United Rentals (NYSE:URI), H&E Equipment Services (NASDAQ:HEES), Neff Corp. (NYSE:NEFF), and Essex Rental Corp. (NASDAQ:ESSX) will be in focus.

United Rentals

United is the largest equipment rental company in the world and has over 880 locations in North America. The company divides its operations into two segments: general rentals and trench, power and pump. The general rental segment includes construction, aerial, industrial and homeowner equipment. The trench, power and pump segment includes specialty construction equipment and services. Shares fell under $4 in 2009, but have since rocketed to above $125. For Q4 2016, the company posted non-GAAP earnings of $2.67 per share, beating the consensus estimate of $2.23.

H&E Equipment Services

H&E focuses on heavy construction and industrial, operating in four core categories: Hi-lift and aerial platforms, cranes, earthmoving equipment, and industrial lift trucks. In these categories, the company sells new and used assets, parts, repair and maintenance of assets, and of course, leasing the assets. In 2009, the stock fell below $5, but has since recovered and now trades above $26. For Q4 2016, the company posted non-GAAP earnings of 35 cents a share, beating the consensus of 27 cents.

Neff Corp.

Neff operates in three categories: oil and gas, residential construction and nonresidential construction. The company's assets include earthmoving, material handling, and other equipment. Neff also sells used equipment in addition to renting out its assets. The company went public in late 2014 and trades in a similar range to its levels in 2014. The company has not reported is Q4 2016 results, but reported non-GAAP earnings of 41 cents a share, which was in line with analysts' expectations.

Essex Rental Corp.

Essex Rental Corp. is a holding company that owns Coast Crane. For those looking for more information on the company and its current state, you can read my previous article here.

Trump Bump

Three of the four companies have seen their share prices rise sharply since the election in November, and one has seen its market cap lose more than one quarter of its value. The chart below summarizes the move in the companies' respective stock prices:

Stock Price at Close
Company 11/7/16 2/27/17 % Change
URI 76.11 128.21 68.5%
HEES 13.57 26.96 98.7%
NEFF 9.00 15.65 73.9%
ESSX 0.21 0.156 -25.7%

United, H&E and Neff have all seen gains over 60% while Essex has not only missed the train, but also actually lost a significant amount of value.

Size of the Companies

United is clearly the biggest of the bunch; it claims to be three times bigger than anyone else in the industry, and its enterprise value is more than 10 times that of H&E. The table below breaks down each company's enterprise value (EV):

Company Market Cap Total Debt Cash EV
URI 10,809,385 7,790,000 312,000 18,287,385
HEES 959,237 792,000 7,680 1,743,557
NEFF 373,409 734,000 840 1,106,569
ESSX 3,930 62,717 0* 66,647

Values in thousands; * ESSX only reports net working capital

Book Value (BV) per Share

Since all the companies in this sector own very tangible assets, I always find it interesting to look at the book values of the companies. Carrying assets at historical values (purchase price) and then using various depreciation schedules make book numbers not necessarily on par with orderly liquidation value (OLV), net realizable value (NRV), or fair market value (FMV). However, this method does help with consistency because it is difficult to estimate OLV, NRV and FMV. The following tables reveal the book value per share of the companies and the multiples that they trade at:

Company BV/share P/Book
URI 19.55 6.56
HEES 4.02 6.71
NEFF -4.07 -3.85
ESSX 0.77 0.20
Company Total BV EV/BV
URI 1,648,000 11.10
HEES 143,000 12.19
NEFF -97,000 -11.41
ESSX 19,309 3.45

Total BV numbers in thousands

Neff has the worst balance sheet of the bunch and actually caries a negative book value. Note this number gets much worse when you look at tangible BV. Neff is in a pretty poor situation with its working capital, and investors should closely monitor the balance sheet. As a result of its poor balance sheet, it is difficult to use these metrics to compare it to the other companies.

United and H&E trade at similar multiples, but Essex has been completely battered by the market. From a value investor view, Essex presents an interesting opportunity. United trades with a PEG ratio of 1.5 and H&E trades with a PEG ratio of 1.6. Neff trades with a very high PEG ratio of 5. For investors looking for growth opportunities, United and H&E may be worth a look.

Conclusion

United and H&E are solid companies with decent growth prospects. Whether or not their recent run has made them fairly valued remains to be seen. Neff has a poor balance sheet, but is still able to generate income and cash from its assets. Essex is severely undervalued and may present an interesting opportunity for value investors. Once Neff and Essex report their Q4 2016 results, I will post another article looking at the FY2016 results of each company and focus more on multiples coming from the income statement and statement of cash flows.

Disclosure: I am/we are long ESSX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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