Construction and industrial equipment services company H&E Equipment Services (NASDAQ:HEES) benefited from a strong rebound in construction across the U.S. post-COVID. The shares were up over 90% over the one-year period leading into the most recent quarterly earnings season. However, after a recent earnings miss and a negative outlook from management for the rest of the year, shares have dipped over 20%.
The stock is relatively undervalued and sports a decent dividend yield of 2.26%, making it a reasonable option in the industrial goods sector for value-oriented investors seeking income.
H&E’s Expanding Reach
H&E Equipment Services is one of the largest integrated equipment services companies in the U.S. It specializes in the rental, sale, and service of heavy construction and industrial equipment.
The company has five primary revenue sources: equipment rentals, new equipment sales, used equipment sales, parts sales, and repair and maintenance services. This comprehensive approach allows the company to maintain a quality rental fleet, an effective distribution channel for fleet disposal, and opportunities for cross-selling among its different operations.
Furthermore, the company recently finalized its acquisition of Lewistown Rental and three of its associated companies in Havre, Glasgow, and Great Falls, Montana. The acquisition supplements H&E’s portfolio with a diverse range of equipment at an original cost of about $28.5 million. This transaction has expanded H&E’s operational reach to 145 branch locations spanning 30 states.
Analysis of H&E’s Recent Financials & Outlook
For the first quarter of 2024, the company reported revenues of $371.4 million, topping consensus estimates of $352.52 million and showing an increase of 15.2% compared to $322.5 million in the same quarter of 2023.
Also, net income was stable, totaling $25.9 million against $25.7 million in the previous year. Adjusted EBITDA experienced a 13.1% increase, touching $161.7 million compared to $143.0 million in 2023. However, the EBITDA margin dipped slightly from 44.4% to 43.6%. Earnings per share (EPS) of $0.71 fell short of expectations for $0.78.
The company’s financial position is stable. On March 31, 2024, the cash and cash equivalents balance was $9.1 million, with a net leverage of 2.1x, within the target range of 2x to 3x. Also, the company’s $1.25 billion of senior unsecured notes have no maturities before December 2028. In Q1, the company paid a quarterly cash dividend of $0.275 per share of common stock.
Management anticipates slowing growth rates for the rest of the year. Contributing factors include high interest rates and tightened lending standards, as well as increasing rental equipment supply. However, looking past 2024, a solid backlog of projects remains that are likely to sustain or potentially boost long-term industry growth.
What is the Price Target for HEES Stock?
Analysts following the company have been bullish on the stock. BofA analyst Sherif El-Sabbahy recently raised the price target for shares from $59 to $60 while maintaining a Buy rating, noting the ongoing concerns about a slowdown in demand but anticipating higher revenue upon recovery.
H&E Equipment Services is rated a Strong Buy based on the recommendations and 12-month price targets assigned by four Wall Street analysts over the past three months. The average price target for HEES stock is $64.75, representing a 32.04% upside from current levels.
The stock has been trending downward recently, shedding – 9.97% in the past 90 days. It trades in the middle of its 52-week price range of $34.86-$66.18 and demonstrates negative momentum, trading below the 20-day (52.17) and 50-day (55.06) moving averages. The recent slide in price has pushed the stock into relative value territory, with a P/E ratio of 10.56x compared to the Rental & Leasing Services industry average of 13.5x.
Bottom Line on H&E Equipment
In conclusion, H&E Equipment Services is one of the market leaders in the equipment rental industry, with a widespread presence across the U.S. While an anticipated downturn in construction will likely directly impact the company over the near term, prospects for growth over the long term remain promising. With negative price momentum, investors may want to keep an eye on the stock for a positive turn before taking advantage of a value trade.
