H&E Equipment Services (NASDAQ:HEES) Misses Q2 Sales Targets, Stock Drops

Machinery provider H&E (NASDAQ:HEES) missed analysts' expectations in Q2 CY2024, with revenue up 4.5% year on year to $376.3 million. It made a GAAP profit of $0.91 per share, down from its profit of $1.14 per share in the same quarter last year.

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Founded after recognizing a growth trend along the Mississippi River and opportunities developing in the earthmoving and construction equipment business, H&E (NASDAQ:HEES) offers machinery for companies to purchase or rent.

Specialty Equipment Distributors

Historically, specialty equipment distributors have boasted deep selection and expertise in sometimes narrow areas like single-use packaging or unique lighting equipment. Additionally, the industry has evolved to include more automated industrial equipment and machinery over the last decade, driving efficiencies and enabling valuable data collection. Specialty equipment distributors whose offerings keep up with these trends can take share in a still-fragmented market, but like the broader industrials sector, this space is at the whim of economic cycles that impact the capital spending and manufacturing propelling industry volumes.

Sales Growth

Examining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, H&E Equipment Services grew its sales at a weak 3.1% compounded annual growth rate. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. H&E Equipment Services's annualized revenue growth of 16.8% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can better understand the company's revenue dynamics by analyzing its most important segment, Equipment. Over the last two years, H&E Equipment Services's Equipment revenue (rentals) averaged 22.9% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company's performance.

This quarter, H&E Equipment Services's revenue grew 4.5% year on year to $376.3 million, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 2.5% over the next 12 months, a deceleration from this quarter.

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Operating Margin

H&E Equipment Services has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.3%. This result isn't surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, H&E Equipment Services's annual operating margin rose by 10.7 percentage points over the last five years, showing its efficiency has meaningfully improved.

In Q2, H&E Equipment Services generated an operating profit margin of 16.7%, down 2.6 percentage points year on year. Since H&E Equipment Services's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

H&E Equipment Services's EPS grew at a remarkable 13.9% compounded annual growth rate over the last five years, higher than its 3.1% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into H&E Equipment Services's quality of earnings can give us a better understanding of its performance. As we mentioned earlier, H&E Equipment Services's operating margin declined this quarter but expanded by 10.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For H&E Equipment Services, its two-year annual EPS growth of 13.7% is similar to its five-year trend, implying strong and stable earnings power.

In Q2, H&E Equipment Services reported EPS at $0.91, down from $1.14 in the same quarter last year. This print missed analysts' estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects H&E Equipment Services to perform poorly. Analysts are projecting its EPS of $4.44 in the last year to shrink by 2.6% to $4.32.

Key Takeaways from H&E Equipment Services's Q2 Results

We struggled to find many strong positives in these results. Its revenue and EPS fell short of Wall Street's estimates. Overall, this was a bad quarter for H&E Equipment Services. The stock traded down 5.3% to $50.13 immediately following the results.

H&E Equipment Services may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.