guvendemir
H&E Equipment Services (NASDAQ:HEES) is one of the largest integrated equipment services organizations in the United States. Since my last report on HEES was published, its stock price has risen by 38% in the last three months. They recently announced their Q2 FY23 results, so I considered writing a follow-up. In my opinion, despite rising 38% in recent times, they are still undervalued and can provide good returns in the short term. Hence, I assign a buy rating on HEES.
Financial Analysis
HEES announced its Q2 FY23 results. The total revenue for Q2 FY23 was $360.2 million, a rise of 22.2% compared to Q2 FY22. I believe the major reason behind the revenue rise was strong revenue growth from its used equipment sales and equipment rentals. The revenues from the used equipment sales grew by 110.5% in Q2 FY23 compared to Q2 FY22. The used equipment market was thriving in Q2 FY23, and the management capitalized on this opportunity by making specific types of equipment more readily available, which I believe was the main reason behind the revenue increase in its used equipment sales. Now talking about the equipment rentals, its revenue grew by 28% in Q2 FY23 compared to Q2 FY22. I believe higher rental rates and growth in its rental fleet were the main reason behind the revenue rise. The rental rates in Q2 FY23 were higher by 7.1% and 1.1% compared to Q2 FY22 and Q1 FY23.
Its gross profit margin for Q2 FY23 was 46.7% which was 44.9% in Q2 FY22. I believe improved gross margins on parts sales and a significant improvement in used equipment sales margins were the main reason behind the rise in gross margin. The gross profit margin on used equipment sales in Q2 FY23 was 59.1% which was 47.6% in Q2 FY22. As a result of increased revenues and gross profit, its net income grew by 56.4% in Q2 FY23 compared to Q2 FY22. In my view, its financial performance in Q2 FY23 was quite impressive. They posted double-digit revenue and net income growth in the first quarter and did the same in the second quarter. To maintain such a high growth rate with improving margins is quite impressive, and I believe due to the solid financial performance, we are seeing a strong appreciation in their stock price.
Technical Analysis
Trading View
It is trading at the $48.7 level. In the last three months, the stock has risen by 38%, indicating that strength is present in the stock. Recently it broke out of the important resistance zone of $48; the stock tried to break the resistance zone in November 2021 but failed miserably, but the second time it broke the $48 level and created a new all-time high of $56. So this is the third instance that the price is near the breakout level, and the positive thing is that it gave a closing above the breakout level of $48. So looking at the strength and momentum in the stock, I believe it has the potential to reach its all-time high of $56 because there are currently no resistance zone or barriers to stop the price. Hence I believe it can be a great short-term trade. Looking at the price chart, I assign a buy rating on HEES one can buy it at the current level with a stop loss of $45 and a target of $56. This would give us a risk-to-reward trade of 1:2.
Should One Invest In HEES?
In the last three months, the stock price has gone up by 38%, and you must be thinking that the movement might exhaust now and the stock might not provide returns in the short term. But I have a different view; the technical chart of the stock is looking strong, and it is a possibility that we might see a strong upward momentum in the stock price in the short term. In addition, if we look at its valuation. It has a P/E [FWD] ratio of 11.27x, lower than the sector ratio of 17.74x, and its five-year average ratio of 16x. It has an EV / EBIT [FWD] ratio of 12.23x, compared to the sector ratio of 15.61x. After looking at the ratios and its solid growth rate, I believe it is undervalued, and even after rising 38% in recent times, I think it still has room for growth. Hence, looking at its positive technical chart, solid financial performance, strong growth rate, and undervaluation, I believe HEES can still provide solid returns to its shareholders. Hence, I assign a buy rating on HEES.
Risk
As of December 31, 2022, they had 2,307 employees who were neither represented by unions nor protected by collective bargaining agreements, whereas 68 employees in Utah, a sizable portion of their Intermountain region, were covered by such agreements. Periodically, different unions try to organize some of their nonunion workers. Work stoppages, slowdowns, or strikes by some of their employees could result from union organizing attempts or collective bargaining agreements, negatively impacting their ability to serve their consumers. Additionally, a reduction in the number of employees covered by collective bargaining agreements or a rise in the number of actual or threatened labor disputes could have unanticipated impacts on labor costs, productivity, and flexibility.
Bottom Line
HEES posted another solid quarterly result with solid revenues and net income growth. I think it is still undervalued and can provide good returns to its shareholders in the short term. Hence, looking at the solid financial performance and positive technical chart, I assign a buy rating on HEES.
