In response to a question from readers of Financial Forum:
"Where is the equipment rental business headed for the rest of this year?
This is a very timely question which becomes seasoned with a liberal amount of concern as we approach the midway point of 2010. In the first of a two-part series, we examine the issues leading up to our present-day situation.
Starting in the early 90s, this industry became a "market darling" and consolidation target because of the terrific cash flows, regional-specific requirements and fragmented markets.
As a wise business guru once said, "There is nothing like good times to create over-optimistic managers," and aside from the 2001 to 2003 time frame, the equipment rental industry has been on a 17-year run of unchecked growth. During these years, many of you have grown at a very fast pace and have taken on huge amounts of debt.
More than any other time since the rental industry became accepted as a reliable equipment source to the construction industry, this recessionary downturn has exposed the absolute dependence our industry has on this revenue source. Due to this dependence - and the ensuing economic problems - the entire rental industry today is overstocked at levels four to five times the current market need.
With the overall construction market strangled due to tight credit and equity requirements, and the number of rental outlets nearly equal to before 2008, there is a frenzy of market discounting on every project, not just the "marquee" projects of years past.
As a result, high "first cost" product cornerstones such as booms and forward-reach forklifts in some areas are transacting at dollar utilizations beneath 15%. This is less than 50% of what is needed to become a performing asset.
So the real questions are: Do you de-fleet and what will the accessibility to credit be after the recession?
Next week, we'll discuss the prospects for the second half of 2010. We'll also take a look at steps that should be taken as quickly as possible to insulate your business against what may continue to be a problematic future for the renewed success of our industry.
Questions or comments? Contact Mike Farley at [email protected].
