Rental equipment swings into high gear.

As we forge through 2006 there is little question that things are flying high once again in the rental equipment industry. I'm talking about the side of the business that gets involved in renting backhoe loaders, skid steers, and mini-excavators. A few years ago, this end market--which many said was impervious to economic downturns--almost bought the farm. Every company was either losing money or going broke, and the big bubble that had been growing for nearly a decade went flat.

Fortunately, these things do get turned around and rental equipment finally came out of its funk in 2004 and was really running in 2005. In 2006, the industry is in high gear and running full out. Rental revenues from equipment, which were about $9.6 billion in 2003, hit $12.8 billion in 2005 and are heading toward $14.0 billion this year. If our projections are right, the industry's growth in three years will be up 45%, which is very good considering where things were in 2003.

We have most big rental companies reporting very good profits and higher revenue levels each quarter. A strong economy and high construction spending for residential and nonresidential construction are helping matters to be about as good as they get for rental equipment. Housing starts, which hit 2 million for the past three years, are still at a level of 1.85 million units, while nonresidential construction of all types is keeping contractors working in every state and most of the provinces in Canada.

So, what is happening with the big rental equipment companies in view of all of this construction and hoopla? Several of the top 10 companies are making some serious changes. Late last year, the Hertz Corp., which had been part of Ford Motor Co., got spun off and sold to three private equity investment companies known as CCMJ Holdings.

Hertz Equipment Rental Corp. (HERC) is a part of all of this, so it no longer answers to Ford. We look for HERC--which has a network of 265 rental locations in North America, total revenues of about $1.4 billion and rental revenues of about $1.0 billion--to get spun off sometime in the next year or two depending on investment market conditions. Hertz Equipment Rental will go for big bucks, when it goes!

Many are probably already aware that RSC Equipment Rental (RSC) is being sold by Atlas Copco. Too much of a good thing, I guess. Atlas has owned the company for about five years, and is ready to move on to bigger and better profits in its business. The operating margin for RSC in 2005 was only 23% before taxes, which isn't too bad considering that it was only 8% in 2003 when life was tough. RSC is the second largest rental equipment company in North America with 465 locations in 38 states and five provinces of Canada and Mexico. "Get out at the top," as they say.

Just recently, NES Rental Holdings in Chicago--with 117 locations in 34 states and fifth in size in the top companies, with $582 million in revenues in 2005--announced that it was being acquired by Diamond Castle Holdings, LLC, a New York-based private equity firm, in a transaction valued at approximately $850 million. Another private equity company swoops in and lands a big rental company. Is there no end to this! How long will this one last?

Then, to top it off, we just learned that NationsRent was just acquired by Sunbelt Rentals, a subsidiary of Ashtead Group, of the United Kingdom, for $1.05 billion. NationsRent, which was in bankruptcy until mid-2003, currently has 269 rental locations in 26 states, which includes 100 locations at Lowe's Home Improvement stores in eight states.

Revenues for the company were nearly $700 million in 2005 and it was profitable. Sunbelt's revenues for fiscal year 2005 ending in April were $661 million. This fiscal year, sales are expected to be at least 23% higher than last year's results, putting Sunbelt in--or close to--second position in all of the big rental companies, particularly when adding the NationsRent business to the total.

I haven't talked about United Rentals, the leading company in the business with over 750 rental locations in the U.S., Canada and Mexico. URI is doing well, with revenues in 2005 topping $3.5 billion and an operating margin of 14%. Total revenue for 2006 will be in the range of $4.0 billion, approximately 73% of that being rental equipment revenue. United is moving forward with its plans to add an additional 30 to 35 branches in 2006 and to reduce its average fleet age modestly from the 40 months it reported at the end of 2005.

Is all of this going to keep flying in 2007? I think it will. Doomsday is not here yet. There is a lot of momentum in the business right now and construction would have to slow dramatically to see the rental equipment business fall into a hole. Housing will slow as we have already seen with reduced housing starts, but nonresidential spending and public construction (watch those tax dollars at work) will keep things going. I believe industry rental revenues will slow down in '07, but there will be revenue growth and there will be higher profits.

Charles R. Yengst is president of Yengst Associates, Wilton, Conn.