H&E Equipment Services Inc. (HEES, Financial) rents, sells and provides parts and maintenance services for heavy construction and industrial equipment.Â
The company has four core categories of equipment, which include aerial work platform equipment, cranes, earthmoving equipment and industrial lift trucks, making it a perfect acquisition target for United Rentals Inc. (URI, Financial).
H&E has been relatively stagnant on the top line since rebounding from the 2008 housing collapse. Sales have hovered around $1 billion since 2013, but the company has become more efficient, leading to increased net income and book value over the last five years.
It also has a solid 3% dividend yield, paying out 30% of its earnings, which could be used by United Rentals to reinvest in growth. In July, H&E reported earnings that beat estimates on both the top and bottom lines. Revenue came in at $310.4 million for the quarter, up 24% year over year, and earnings were 58 cents per share. The upward trend in construction continues and, despite the looming Skyscraper Curse, which is an eerily accurate predictor of economic catastrophe, real estate markets are in dire need of more affordable housing.
H&E is being undervalued by the market right now. The stock is priced below historical price-earnings and price-book values. The company expects to earn $2.20 per share by 2019 and push the book value past $7, which would place the stock range between $46 to $58 per share based on historical averages.
H&E Equipment was founded in 1961 as Head & Engquist. It has built a wide footprint that stretches across 22 states, many of which overlap current United Rentals sales regions. If United Rentals were to acquire the company, it would need to be assured that the $1.1 billion in revenue add and $168 million earnings before interest, taxes, depreciation and amortization would be deals it couldn’t have done by simply lowering its own costs.
H&E could fit well under the United umbrella, especially considering the company has excellent margins and is, in part, family owned and operated. The CEO, John Engquist, is the founder’s son. He bought the company from his father in 1995.
United Rentals bought Neff and NES in 2017 for $1.57 billion, assuming $700 million in debt. Buying H&E would save them a ton of cash on the selling, general and administrative costs front, add 10% of assets to the balance sheet and only $629 million in long-term debt.
With or without United Rentals, H&E is a solid stock to own from a dividend perspective. It could also merge with Sunbelt Equipment, which is owned by the Ashtead Group (ASHTF, Financial), putting that company in a stronger competitive seat versus United Rentals. In either case, it should be considered an acquisition target.
Disclosure: I am not long or short any stocks mentioned in this article.
