By: AccuVal Associates, Inc.
According to a recent article in The Wall Street Journal, heavy equipment powerhouse Caterpillar Inc. (NYSE: CAT) reported in late August that global retail sales of its construction machinery rose 35 percent in the quarter ending July 31, though the pace of growth weakened in all regions except Latin America. But don't give the word 'weakened' too much credit. There is a lot of action here. The article continued to explain that July was the 15th straight three-month period of sales expansion for the world's largest seller of bulldozers, excavators and wheel loaders.
Caterpillar Inc. CEO Doug Oberhelman recently discussed business conditions and his company's direction on CNBC. Oberhelman said he's optimistic based on the company's day-to-day sales and discussions with customers and distributors around the world. Caterpillar Inc. has responded with recent plans for new plants and parts distribution facilities. The company has hired 11,000 people since 2010, with 300 new hires in just the first ten days of August, Oberhelman said.
Today, a significant portion of the heavy mobile equipment spectrum includes businesses engaged in rentals of construction equipment, vocational trucks, lift equipment and related items. This segment of the business has shown relative strength over the last ten years and is poised for continued growth as the domestic economy continues its slow, steady pace of recovery. AccuVal continues to believe strongly in this business model with regard to risk management. Here's why:
Many users of construction equipment have shifted their focus from self-contained fleets to utilizing the services of rental houses. This has led to considerable growth in the sector, as well as consolidations, mergers and other industry realignment. Even some of the original equipment manufacturers (OEMs) have now joined the rental industry. Through consolidation and the emergence of the OEMs, the rental equipment sector has enjoyed gains in market position and pricing power.
These businesses must carry the types of machines that are in demand in their area. Their customers' needs must be met, or the customers will go elsewhere. Careful analysis of market trends, utilization levels, rental rates and other data allow rental houses to respond quickly to shifts in market dynamics while providing lenders and appraisers with a looking glass into company operations.
The nature of the business allows for flexibility in fleet composition. Effective fleet management is ongoing and elemental to a rental company's success. For example, if a particular region were to experience significant growth in pipeline construction, area rental firms would likely add to or bolster their fleets with the types of machines common to that segment of construction. As the various projects are completed and the associated need for these items fades, the equipment is divested, generating capital that can then be allocated toward assets in greater demand.
Fleet management executives at rental firms are often highly knowledgeable in the used equipment marketplace. They are typically aware of new and used equipment values, current liquidation activity and other market dynamics at a level consistent with used machinery dealers. This is because rental houses are actually 'in' the used equipment business. Almost every piece of equipment at a rental company is really 'for sale'. The firms are continually adding to and subtracting from their fleets, either in response to market dynamics or to replace aging equipment. These savvy company contacts can serve to assist lenders and appraisers in truly understanding the nature and scope of appraised fleets.
Recent auction activity and reported sales of new equipment suggest that exports still command a significant portion of the marketplace. Yet, cyclical weakness in the domestic market can be offset by export demand, providing a level of support for equipment values. In addition, the used construction equipment industry is highly organized. Many resources, such as trade magazines, websites, trade associations, electronic mail lists and other means are readily available to promote liquidation or auction sales.
In a successful rental business, the majority of assets are in use with customers, meaning they are likely to be in sound and desirable working condition. Machines not out on rent must be in 'rental ready' condition, which means they have been inspected, repaired, calibrated as needed, cleaned and made ready to be sent back to work. This allows appraisers to project valuations toward the higher end of the market spectrum and serves to attract strong interest should liquidation become necessary.
Construction equipment rental firms typically deliver and pick up machinery to and from customer job sites. In order to do so, they will utilize a fleet of heavy spec truck tractors and heavy duty trailers designed to handle the equipment. These assets are quite often in demand, allowing for increased overall value in appraisal analysis and access to additional liquidity in the event of a disposition.
In many cases, an internally distressed rental branch represents an engaging opportunity for competitors looking to expand. Branches or groups of locations can be sold to strategic buyers intact, avoiding the need for public auctions or extended orderly liquidations and saving jobs in the process. Further, enterprise value can serve to bolster the value of the entire fleet in such a setting, maximizing return on investment.
AccuVal wishes to acknowledge Roger Meyers for his significant contribution to this article. Roger is a 23-year veteran of the used machinery industry. He provides consulting services to auctioneers, liquidators, appraisers and equipment dealers. Follow Roger on Twitter: @Roger_Meyers.
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.