Rating Update: Stock Rating B-Positive (9/23/19)-H&E Equipment Services Inc (HEES).

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BUSINESS

H&E Equipment Services, Inc. operates as an integrated equipment services company. The company rents, sells, and provides parts and support services for hi-lift or aerial work platform equipment, cranes, earthmoving equipment, and industrial lift trucks. It offers heavy construction and industrial equipment for rent on a daily, weekly, and monthly basis. As of December 31, 2017, the company’s rental fleet consisted of 31,387 pieces of equipment. It also sells new and used equipment, as well as parts; and provides maintenance and repair services for the customers’ owned equipment. In addition, the company offers ancillary equipment support activities, including transportation, hauling, parts shipping, and loss damage waivers.
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INVESTMENT RATING

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HEES’ future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

H&E Equipment Servs has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. H&E Equipment Servs has a slightly positive Appreciation Score of 65 and a slightly positive Power Rating of 68, with the Positive Value Trend Rating the result.

H&E Equipment Servs’ stock is selling well below targeted value. The current stock price of $28.65 compares to targeted value 12 months forward of $43.
This moderately high appreciation potential results in an appreciation score of 65 (only 35% of the universe has greater appreciation potential.)
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H&E Equipment Servs has a Power Rating of 68. (HEES’ slightly positive Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 32% of companies in the universe.)
Factors contributing to this slightly positive Power Rating include: the recent trend in HEES’ earnings estimates has been favorable; is currently in a modestly favorable positi; and recent price action has been neutral.

INVESTMENT PROFILE

HEES’ financial strength is high. Financial strength rating is 77.
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Relative to the S&P 500 Composite, H&E Equipment Services Inc has moderate Growth characteristics; its appeal is likely to be to Income-oriented investors; the perception is that HEES is higher risk. Relative weaknesses include: high stock price volatility, and high financial leverage. HEES’ valuation is low: high dividend yield, low P/E ratio, and moderate price/book ratio. HEES has unusually low market capitalization.

CURRENT SIGNALS

H&E Equipment Servs’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; and falling tax keep rate.

H&E Equipment Servs’ current technical position is mixed. The stock price is in a 0.9 month down move. The stock has declined 16.7% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.

ALERTS

H&E Equipment Services Inc (NASDAQ: HEES) has recently enjoyed meaningful positive changes in investment behavior: positive upside/downside volume developed.
The stock is currently rated B.
H&E Equipment Services Inc (NASDAQ: HEES) stock enjoyed a major increase of 9900.0% on 9/23/19. The shares closed at $0.00. However, trading volume in this advance was unusually low at 60% of normal. The stock has performed in line with the market over the last nine months and has risen 3.7% during the last week.

CASH FLOW

In 2018, H&E Equipment Servs experienced a very significant reduction in cash of -$149.2 million (-90%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$396.6 million. Non-operating sources contributed +$8.1 million (+2% of EBITDA). Cash taxes consumed -$1.3 million (-0% of EBITDA). Re-investment in the business amounted to -$624.6 million (-157% of EBITDA). On a net basis, debt investors contributed +$108.6 million (+27% of EBITDA) while equity investors pulled out -$36.6 million (-9% of EBITDA).
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H&E Equipment Servs’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the H&E Equipment Services Inc Peer Group. In most years, H&E Equipment Servs was in the top quartile. Currently, H&E Equipment Servs is upper quartile at +2% of EBITDA (+$8.1 million).

H&E Equipment Servs’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the H&E Equipment Services Inc Peer Group as well. In most years, H&E Equipment Servs was in the top quartile and second quartile. Currently, H&E Equipment Servs is above median at -0% of EBITDA (-$1.3 million).

H&E Equipment Servs’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the H&E Equipment Services Inc Peer Group. (Since 2015 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, H&E Equipment Servs was in the third quartile and top quartile. Currently, H&E Equipment Servs is substantially below median at -157% of EBITDA (-$624.6 million).

H&E Equipment Servs’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the H&E Equipment Services Inc Peer Group. (Since 2015 Debt Investors, %EBITDA has accelerated very sharply.) In most years, H&E Equipment Servs was in the top quartile and third quartile. Currently, H&E Equipment Servs is at median at +27% of EBITDA (+$108.6 million).

H&E Equipment Servs’ Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the H&E Equipment Services Inc Peer Group as well. In most years, H&E Equipment Servs was in the second quartile and top quartile. Currently, H&E Equipment Servs is above median at -9% of EBITDA (-$36.6 million).

H&E Equipment Servs’ Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the H&E Equipment Services Inc Peer Group. In most years, H&E Equipment Servs was in the third quartile and second quartile. Currently, H&E Equipment Servs is lower quartile at -38% of EBITDA (-$149.2 million).
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H&E Equipment Servs’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the H&E Equipment Services Inc Peer Group as well. In most years, H&E Equipment Servs was in the lower quartile and third quartile. Currently, H&E Equipment Servs is at the lower quartile at +1%.

PROFITABILITY

HEES’ return on equity has improved very significantly since 2011 although it experienced a very sharp decline after the 2017 high.
This very significant improvement was due to very strong positive trend in pretax operating return supported by strong positive trend in non-operating factors.
The productivity of HEES’ assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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HEES’ return on equity is slightly above median (30.2%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at median (5.5%) reflecting asset turnover that is below median (0.64X) and at median pretax margin (8.7%).
Tax “keep” rate (income tax management) is at the lower quartile (73.0%) resulting in after tax return on assets that is slightly below median.
Financial leverage (leverage) is upper quartile (7.48X).

GROWTH RATES

There are no significant differences between H&E Equipment Services’ longer term growth and growth in recent years.
H&E Equipment Services’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 7.1% per year.

Total asset growth has been 10.4% per year.

Annual E.P.S. growth has been 24.6% per year.

Equity growth has been 1.5% per year. (More recently it has been 24.4%.)

H&E Equipment Services’ consensus growth rate forecast (average of Wall Street analysts) is 10.7% — in line with the average of the historical growth measures.
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Relative to the H&E Equipment Services Inc Peer Group, H&E Equipment Servs’ historical growth measures are erratic. Total asset growth (10.4%) has been upper quartile. Revenue growth (7.1%) has been at the upper quartile. E.P.S. growth (24.6%) has been at the upper quartile. Equity growth (1.5%) has been below median.

Consensus growth forecast (10.7%) is above median.
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PRICE HISTORY

Over the full time period, H&E Equipment Services’ stock price performance has been volatile and quite good. Between November, 2008 and September, 2019, H&E Equipment Services’ stock price rose +326%; relative to the market, this was a +28% gain. Significant price moves during the period: 1) June, 2017 – December, 2017: +106%; 2) March, 2015 – January, 2016: -53%; 3) August, 2014 – January, 2015: -57%; 4) September, 2012 – August, 2014: +238%; 5) September, 2011 – April, 2012: +134%; and 6) April, 2011 – September, 2011: -59%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -13.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of -13.3% is substantially below median relative to H&E Equipment Services Inc Peer Group.

Current 5-year total return performance of 1.2% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of 1.2% relative to S&P 500 Composite, H&E Equipment Servs’ total return performance is below median relative to H&E Equipment Services Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, HEES’ overall valuation is low. The highest factor, the price/equity ratio, is slightly above median. Ratio of enterprise value/earnings before interest and taxes is below median. Ratio of enterprise value/assets is below median. Price/earnings ratio is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is near the lower quartile.
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H&E Equipment Servs has a major value gap compared to the median. For HEES to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.85X to 1.35X. If HEES’ ratio of enterprise value/revenue were to fall to 1.35X, its stock price would be lower by $-18 to $10.
For HEES to achieve upper quartile valuation relative to the H&E Equipment Services Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.85X to 2.47X. If HEES’ ratio of enterprise value/revenue were to rise to 2.47X, its stock price would increase by $23 from the current level of $29.

VALUE TARGETS

HEES’ future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
H&E Equipment Services’ current Price Target of $44 represents a +53% change from the current price of $28.65.
This moderately high appreciation potential results in an appreciation score of 65 (only 35% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 65, the moderately high Power Rating of 68 contributes to an Value Trend Rating of B.
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H&E Equipment Services’ current Price Target is $44 (+35% from the 2018 Target of $32 and +53% from the 09/23/19 price of $28.65). This dramatic rise in the Target is the result of a +22% increase in the equity base and a +11% increase in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in return on equity has no negative impact as well. More than offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 26.9% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly below the 2012 peak of 64%.

PTR’s growth forecast is 13.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2013 low of 3%.

PTR’s cost of equity forecast is 12.8% — slightly above recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2011 low of 5.4%.
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At H&E Equipment Services’ current price of $28.65, investors are placing a positive value of $10 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 8.0% per year, and a return on equity of 27.0% versus a cost of equity of 11.7%.
PTR’s 2020 Price Target of $44 is based on these forecasts and reflects an estimated value of existing assets of $21 and a value of future investments of $23.

About John Lafferty 57444 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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