Branch Expansion And Mega Projects Will Boost Future Construction Opportunities

Key Takeaways

• Strategic branch expansion and mega projects position H&E Equipment Services for growth in regions with robust construction activity, boosting future revenue and margins.
  
• Easing interest rates and a young fleet enhance operational efficiency, supporting profitability and improved net margins over time.
  
• Reduced construction spending, lower utilization, and higher expenses could pressure H&E Equipment Services' revenue growth, margins, and future demand fulfillment.

Catalysts

Operates as an integrated equipment services company in the United States.

• The company's strategic branch expansion program has led to a growing operational presence across a 32-state footprint, positioning H&E Equipment Services to capture more opportunities, especially in regions with robust construction activity, potentially increasing future revenue.
  
• Mega projects, characterized by large equipment volumes and long durations, are expected to drive growth. H&E’s growing involvement in these projects suggests improved utilization and yields, which can positively impact revenue and margins.
  
• The Dodge Momentum Index, a leading indicator of construction spending, has shown gains, and a cycle of easing interest rates is anticipated to improve local construction activity in 2025, potentially boosting revenues and earnings for H&E.
  
• The ongoing expansion and opening of new branches, with a record number of additions in 2024, are expected to lead to greater market presence and financial performance, supporting future revenue growth and profitability.
  
• The focus on maintaining a young fleet age and the disciplined approach to fleet investment are designed to maximize operational efficiency and profitability, potentially leading to improved net margins and earnings over time.

H&E Equipment Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming H&E Equipment Services's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.5% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $141.4 million (and earnings per share of $3.98) by about January 2028, down from $143.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the US Trade Distributors industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

H&E Equipment Services Future Earnings Per Share Growth

Risks

• Reduced construction spending and extended periods of elevated interest rates have resulted in mixed spending levels in non-residential construction, which might dampen future revenue growth.
  
• A 240 basis point decline in physical utilization, despite new locations, indicates oversupply or reduced demand, impacting revenue and net margins.
  
• The company experienced a 4% decline in total revenues and a decrease of over 47% in sales of rental equipment, suggesting weaker financial performance in terms of revenue.
  
• The 2024 gross fleet investment was significantly reduced by 45% compared to 2023, which might affect the company's ability to meet future demand and impact long-term revenue growth.
  
• Higher SG&A expenses attributed to branch expansion, without immediate revenue offset, could pressure net margins and earnings, especially if new branches take time to reach targets.

Valuation

• The analysts have a consensus price target of $64.5 for H&E Equipment Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $78.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $141.4 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 8.0%.
• Given the current share price of $47.3, the analyst's price target of $64.5 is 26.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.