Questions to Ask in an Uncertain Cycle

Jan. 1, 2008
The rental industry is a cyclical one and in different ways. Obviously when construction is strong, rental is strong because there are a lot of jobs.

The rental industry is a cyclical one and in different ways. Obviously when construction is strong, rental is strong because there are a lot of jobs. When construction slows, the rental environment becomes more challenging.

The current cycle is a bit of a mixed bag. Rental companies heavily tied to earthmoving are obviously feeling the pain from the slowdown in housing, but companies with more diverse fleets are pointing to continuing strength in the commercial construction and industrial segments, although the current prognosis varies from state to state, city to city, market to market.

History has taught us that while demand is less robust when construction is slower — and the consensus is that 2008 will be less vibrant than in recent years — it can be a good opportunity for rental to become a more attractive option for some contractors feeling the effects of a housing slowdown. Contractors are often forced to diversify when times are slower. To keep busy, in many cases, rather than stick to their specialties, they may need to take any job they can get. Often they will rent more because they are using equipment they don't normally use when they have their choice of jobs during an economic expansion.

Another way rental is cyclical is on the stock market and in interest from private equity. A year or two ago, record deals were being consummated as private equity saw rental as a business with great upside. I rarely went through a week or two without getting a call from investors taking a look at the rental equipment “space,” often asking questions that indicated they had already put considerable time and research into understanding the dynamics of the rental market.

It reminded me in many ways of the late '90s when, after companies such as United Rentals, NationsRent and NES exploded onto the rental scene and consolidation was in full expansion mode, investors were fascinated with their new discovery — equipment rental. A few years later when recession set in, these investors abandoned the rental industry in droves and rental company stocks languished and, in some cases, couldn't remain viable.

Cerberus' recent abandonment of its acquisition of United Rentals was in a way a harbinger of the cyclical misgivings the investment community has about rentals. While the consensus among people close to the situation was that Cerberus' decision to back out of the deal was more related to difficulties Cerberus was having with other large investments it had already made, rather than concerns it had about equipment rental, the decision was hardly a great endorsement of the rental industry. The stock prices of other public companies such as H&E Equipment Rentals and RSC Rental are not exactly blowing through the roof despite strong financial performance and margins, and investor interest in rental has obviously slowed.

This doesn't mean acquisitions won't happen, or that stock prices won't go up. It's just that now, once again, the Wall Street and private equity honeymoons are on the back burner, and rental companies will have to just continue to do what they do best — operate efficiently and effectively, create value for their customers and, where applicable, for their shareholders.

There are many ways to do that and this month's cover story by RER staffers Brandey Smith and Katie Eagan Ernzen offer some interesting tips “worth sharpening.” From enhanced training programs to more detailed attention to electrical safety to more efficient and professional dispatching, there are many ways to improve your business. To the vast majority of rental companies, that's what they are most interested in and that's what will determine their livelihood.

Never mind what the millionaires on Wall Street think about the industry. What do you think about your business? What do your customers think? Is there a way to make your business better?

While you may be asking, “Can I get a good price from a buyer?,” you might be better off in this cycle asking different kinds of questions: Is your equipment inventory full of equipment that is highly utilized or is too much of it sitting underutilized? Are you making a thorough effort to determine what your customers need and want? Are you investigating opportunities to offer equipment you haven't carried in the past that your customers can really use? Is your rental center a safe one? Do your delivery drivers enhance your business by delivering equipment safely and answering questions customers on the jobsite might have? Do your facilities look like professional operations or are they one step up from junkyards? Does your staff communicate with customers professionally or do they sound bored and indifferent?

I'd say those are the questions to ask as 2008 begins.