H&E Equipment Services, Inc. (NASDAQ:HEES) is one of the largest rental equipment companies in the nation, serving customers at its 140 branch locations across 30 states. The company's fleet is comprised of aerial work platforms, earthmoving, material handling, and other general and specialty lines, catering to a diverse set of end markets in high-growth geographies.

Founded in 1961, H&E has been in the equipment services business for over 60 years. The company was formed in 2002 through the business combination of Head & Engquist and ICM Equipment Company, and went public in 2006. In 2023, H&E reported annual revenue of $1,469,216,000 and net income of $169,293,000. The company generated annual operating cash flow of $405,483,000, though its annual free cash flow was negative $340,349,000 as it continued to invest in its rental fleet and branch network expansion.

Business Overview

H&E's primary focus is on equipment rentals, which accounted for 80% of its total revenues in the first quarter of 2024. The company also engages in the sales of rental equipment, sales of new equipment, parts sales, and repair and maintenance services. H&E's rental fleet is among the industry's youngest, with an average age of 39.9 months as of March 31, 2024.

The company's rental operations are supported by a dedicated sales team and a well-maintained fleet. H&E actively manages the size, quality, age, and composition of its rental fleet based on key metrics such as time utilization, rental rate trends, rental equipment dollar utilization, and maintenance and repair costs. As of March 31, 2024, the company's rental fleet consisted of 60,885 units with an original acquisition cost of approximately $2.8 billion.

In addition to its rental business, H&E generates revenues from the sale of used equipment from its rental fleet, which accounted for 13% of total revenues in the first quarter of 2024. The company also sells new equipment through its professional sales force, contributing 3% of total revenues. Parts, service, and other sales made up the remaining 4% of total revenues.

Financials

H&E's financial performance in the first quarter of 2024 was marked by strong year-over-year growth across key metrics. Total revenues increased 15.2% to $371.4 million, driven by a 12.7% rise in equipment rental revenues to $295.3 million and a 49.8% surge in sales of rental equipment to $48.1 million.

Gross profit for the quarter increased 16.6% to $164.9 million, with gross margins expanding slightly to 44.4% from 43.8% in the prior-year period. This improvement was largely attributable to higher gross margins on the sale of rental equipment, which reached 62.9% compared to 58.6% in the first quarter of 2023.

Despite the increase in SG&A expenses, which rose 19.9% to $114.3 million, H&E's income from operations grew 11.4% to $52.0 million, representing a margin of 14.0%. Net income for the quarter was $25.9 million, relatively flat compared to the $25.7 million reported in the first quarter of 2023.

Adjusted EBITDA, a key metric for the company, increased 13.1% to $161.7 million, with the margin declining slightly to 43.6% from 44.4% in the prior-year period. On a trailing 12-month basis, H&E's adjusted EBITDA totaled $706.9 million, up 21.7% compared to the prior 12-month period, with the margin improving 170 basis points to 46.6%.

Rental Performance

H&E's rental revenues grew 12.7% year-over-year to $295.3 million in the first quarter of 2024, with gross margins remaining relatively stable at 48.5% compared to 48.4% in the prior-year period. The company's rental fleet expansion and branch network growth were key drivers of this performance, with the original equipment cost (OEC) of the rental fleet increasing 15.7% to over $2.8 billion as of March 31, 2024.

Rental rates improved 2.9% year-over-year in the first quarter, though they declined slightly by 0.2% on a sequential basis. Physical fleet utilization, however, averaged 63.6% in the quarter, down 370 basis points from the prior-year period, primarily due to lower-than-anticipated construction activity and project delays resulting from unfavorable weather conditions.

Rental equipment dollar utilization, a key metric for the company, was 37.0% in the first quarter of 2024, down from 38.6% in the same period of 2023. This decrease was primarily attributable to the lower physical utilization and the impact of the additional 20 branch locations added over the past 12 months.

Growth Initiatives and Outlook

H&E remains focused on its growth initiatives, including investments in its rental fleet and further branch expansion. The company has reduced its 2024 guidance for gross fleet investment to a range of $350 million to $400 million, down from its initial guidance of $450 million to $500 million. This more balanced approach to capital spending reflects the company's view of moderating industry fundamentals, though H&E maintains the flexibility to increase spending should demand accelerate.

Despite the slower anticipated start to 2024, the company's branch expansion plans remain intact, with 12 to 15 new locations expected to be added this year. H&E has also recently completed the acquisition of Precision Rentals, which added two branch locations in Arizona and Colorado, and announced the pending acquisition of four locations in Montana.

Looking ahead, the company expects the construction and industrial equipment rental industry to demonstrate further growth in 2024, albeit at a slower pace than the exceptional rates experienced over the past two years. According to industry forecasts, construction starts are projected to improve 7% in 2024, while U.S. equipment rental revenue is expected to grow nearly 8%.

H&E is well-positioned to capitalize on these industry trends, having expanded its branch network by more than 40% and its rental fleet by 15.7% over the past 36 months. The company's significant investments in its infrastructure and geographic footprint have laid the foundation for improved financial performance through the cycle, with enhanced prospects for higher revenue generation and better margin performance.

Risks and Challenges

H&E is exposed to various risks, including economic downturns, fluctuations in customer spending levels, adverse weather conditions, and changes in regional and industry-specific activity and trends. The company is also subject to comprehensive environmental and occupational health and safety regulations, which could result in increased operational and compliance expenditures.

Liquidity

As of March 31, 2024, H&E had a strong liquidity position, with $9.1 million in cash and cash equivalents and $483.0 million in available borrowings under its $750.0 million senior secured credit facility, net of $12.3 million in outstanding letters of credit. The company's net leverage ratio remained at 2.1x, well within its target range of 2x to 3x. H&E has no debt maturities before December 2028, when its $1.25 billion in senior unsecured notes come due.

Conclusion

H&E Equipment Services is a well-established and diversified equipment rental company that has demonstrated its ability to navigate industry cycles and capitalize on growth opportunities. The company's significant investments in its rental fleet, branch network, and geographic expansion have positioned it to continue delivering strong financial performance, even as the industry transitions to a period of more moderate growth.

With a focus on operational excellence, a commitment to customer service, and a prudent approach to capital allocation, H&E is poised to maintain its position as a leading player in the equipment rental industry. As the company continues to execute on its growth strategy and leverage its enhanced scale and capabilities, investors can look forward to the potential for sustained value creation.