Equipment Rental Company Valuations – June 2023

The equipment rental industry saw sharp increases in financial performance and valuation since a modest retraction in 2020. These increases have been generally consistent across all publicly traded equipment rental companies through June 2023. This article will examine some of the factors that appeared to impact the valuations of equipment rental companies.

Important notes: This article examines potential driving factors for publicly-traded equipment rental company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what are typically perceived to be primary value drivers. It will not touch on every observation in the data. Check out What is Value? and Risk and Return in the Market Approach for a quick read on the basics of risk and return and how they apply to this article.

The industry constituents for this analysis are listed below. We searched for public companies based on the U.S. and traded on major U.S. exchanges with a minimum stock price of $1.00. The effective date of this analysis is June 30, 2023.

List of constituents analyzed in this article

Figure 1 summarizes three items for the equipment rental companies:

  • Market value of invested capital (“MVIC”) calculated as the sum of market capitalization and interest-bearing debt;
  • Median revenues; and
  • Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

The latest fiscal year is notated “LFY” (2022), while the latest 12 months is labeled “LTM” (latest available information as of June 30, 2023).

Fig. 1 - Trend of historical market value of invested capital, revenue, and EBITDA

Bouncing back from a decline in financial performance in 2020 due to COVID, the industry has generated impressive revenue and EBITDA growth and valuations have followed suit. The American Rental Association, in its 2022 “State of the Equipment Rental Industry” report, indicated that the equipment rental industry benefited from higher overall demand for equipment, supported by the positive impact of increased infrastructure spending.

While this demand has generated record growth for the industry, it has not come without challenges. Labor shortages, rising wages, and supply chain issues delaying lead times for parts and supplies have required industry leaders to alter strategies. Industry operators have had to budget two to three years ahead of time to ensure the latest technologies are available within new equipment purchases in order to maintain competitiveness in the market. The use of telematics has also become commonplace to better track equipment to maximize efficiency.

Valuation Multiples

Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).

Fig. 2 – Trend of historical median revenue multiples
Fig. 3 – Trend of historical median EBITDA multiples

Revenue and EBITDA multiples increased through 2021 and then declined in 2022 as financial metric growth rates outpaced improvements in valuations. Valuation multiples remained generally consistent in June 2023. We will explore the various factors that appear to be impacting valuation multiples in the industry.

The Growth Story

Growth often has a strong influence on how companies are valued. Next, we present a summary of the consensus forecasts for each group in Figures 4 and 5 below (note that “NFY” means next fiscal year; NFY = calendar 2023 for most companies).

Fig. 4 – Comparison of historical and projected revenue growth: prior year vs. current year
Fig. 5 - Comparison of historical and projected EBITDA growth: prior year vs. current year

In Figures 4 and 5, the orange line represents data as of June 30, 2022. At the time, the industry expected strong revenue growth for 2022, modest growth in 2023, and a sharp increase in financial performance in 2024. Actual results for 2022 were somewhat lower than expected for the year. However, current projections continue to mimic the growth rates expected a year ago.

We also looked to identify meaningful relationships between growth and observed revenue and EBITDA multiples. Figures 6 and 7 present projected growth rates as compared to their respective valuation multiples.

Fig. 6 – Chart plotting revenue multiples against projected revenue growth rates
Fig. 7 – Chart plotting EBITDA multiples against projected EBITDA growth rates

In Figures 6 and 7, we were not able to identify a meaningful correlation between valuation multiples and projected growth rates.

See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.

The Size Story

Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.

Figure 8 presents each company’s market capitalizations plotted against its respective LTM revenue multiple.

Fig. 8 – Chart plotting revenue multiples against market capitalization

Based on Figure 8, it appears that larger companies tended to trade at higher valuation multiples and vice versa.

The Profitability Story

Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. In this case, we identified a tendency for companies with higher projected levels of profitability to trade at higher valuation multiples, as shown in Figure 9.

Fig. 9 – Chart plotting revenue multiples against EBITDA margins

The relationship between profitability and revenue multiples appears to apply for most companies in the group. We noted that the larger companies in the dataset tended to be the more profitable, which may have impacted the observed trend in valuation multiples to size and profitability.

The Leverage Story

Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders. One measurement of leverage is the interest coverage ratio, which measures a company’s ability to pay for its debt obligations (interest expense).

Figure 10 plots LTM revenue multiples against their interest coverage ratios.

Fig. 10 – Chart plotting revenue multiples against interest coverage ratios

We observed the companies with the highest interest coverage ratios appear to be trading at the highest revenue multiples. However, the companies with higher interest coverage ratios also tended to be larger and more profitable.

Tying it All Together

The trends observed in this article suggest that investors are considering multiple factors, including size, profitability, and leverage. As was noted above, however, these factors were somewhat tied to one another as the largest companies tended to also be the most profitable and have the highest interest coverage ratios. Interestingly, we did not observe any meaningful correlation between growth and valuation multiples. This may indicate that investors have priced in the high growth expected in the industry and are focused on profitability and other risk-mitigating factors (size and leverage).

I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.