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Industrial Market Paces Fourth-Quarter Growth

March 1, 2012
Baird, in partnership with RER, recently published the results of its fourth-quarter 2011 rental equipment industry survey, which showed continued rental

Sustained growth in rental revenue, rates and fleet size and a moderation of utilization rates in the fourth quarter of 2011 push estimates of 2012 forecasts upward, the latest Baird/RER survey shows.

Baird, in partnership with RER, recently published the results of its fourth-quarter 2011 rental equipment industry survey, which showed continued rental revenue growth of 11.5 percent, a slight acceleration sequentially from gains of 10.1 percent year over year in the third quarter of 2011. “Rental remains strong due to the slow economy, and customers want to leverage their risk through rental,” one respondent said.

Survey respondents report that steady demand in industrial markets continues while non-residential construction remains spotty, though some regions are showing some pockets of improvement. The consensus continues to show, however, that residential markets are still lagging furthest behind.

“Steady demand in the industrial market continues; non-residential construction market still spotty, however we are beginning to see some pockets of improvement,” noted one survey respondent.

Another noted the absence of residential construction work, but pointed to a formerly boarded up construction project resuming for positive signs of life going forward.

Respondents' reported growth in fleet size of 7.4 percent year over year, an increase from the 6.6-percent growth reported in Q311.

Rental rates rose slightly to a gain of 3.8 percent year over year, a slight improvement from the 3.3-percent growth shown in the third-quarter survey. Despite higher overall rental rates, competitive dynamics continue to vary by market with some regions experiencing solid demand pushing rates higher while other regions continue to experience rate pressure from the national rental companies.

“The big rental houses are pushing the rates up,” said one respondent. “Smaller companies are disappearing.”

“[There is] continuing improvement in business conditions and a slight improvement in rental rates,” said another.

On average, utilization rates moderated to 55.9 percent during the quarter vs. 55.4 percent last quarter. Average utilization for “big iron” equipment was 61.0 percent, “small iron” was 52.1 percent and “other” was 43.9 percent. One respondent pointed to the improvements to utilization and pricing as a sign that purse strings are starting to loosen.

“There is continued momentum as we move into 2012 with increased revenue and utilization,” a survey respondent said.

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“We are still very much a rent-to-sell market,” added another. “Inventories remain under pressure due to manufacturer availability, which should translate to higher realized rates and utilization this spring.”

Fourth-quarter used equipment sales increased 8.4 percent year over year, up slightly from 5.4 percent year over year in Q311. In the fourth quarter, survey participants reported that the number of units in their fleet increased by 7.4 percent year over year, up slightly vs. a gain of 6.6 percent year over year in the same period of 2010.

The initial 2012 rental revenue forecast from the Baird/RER survey shows estimates trending upward to growth of 11.0 percent vs. the initial 6.9 percent outlook reported last quarter. “Similar to current trends, there is still a divergence in tone of business by market and geography,” said David Manthey, chartered financial analyst, Robert W. Baird & Co.

The 2012 outlook for rental rates also improved with the latest survey. Estimates show that rental rates will increase 5.4 percent, up from the initial 2012 outlook given last quarter of 4.3-percent growth.

Respondents expect fleet spending over the next six months to grow 8.6 percent, slightly below the 9.6 percent forecast in Q311. “We believe that expectations for higher fleet spending continue to be driven by both an improved outlook and aging fleets, but note some lingering concerns over availability and financing,” Manthey added.

Participants in the Baird/RER survey are senior corporate executives or senior managers at regional divisions of rental equipment businesses in all regions of the United States, parts of Canada and some international markets, representing nearly $16 billion in annual revenue.

Robert W. Baird & Co. is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. For more information, visit Baird's website at: