Rating: Neutral Price: $16.63
52-wk Range: $18.44-$5.31 Price Target: NA
FY Ends ---- EPS ---- ---- CEPS ---- Rel. P/E
Dec. Curr Prior P/E Curr Prior P/CE (SP 500) Pr/Bk
1998A* $0.25 - 66.5x $4.03 - 4.1x 199.7% 3.3x
1999E $0.65 - 25.6x $3.89 - 4.3x 83.9% 3.1x
2000E $0.80 - 20.8x $4.55 - 3.7x 74.8% 2.7x
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Qtrly --- 1Q --- --- 2Q --- --- 3Q --- --- 4Q ---
EPS Curr Prior Curr Prior Curr Prior Curr Prior
1998A NA - $0.05 - $0.08 - $0.12 -
1999E $0.03A - $0.19A - $0.24 - $0.19 -
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5 Yr. EPS Growth: 40% Mkt Cap./Rev: 0.77x
Dividend:-- Yield:-- Mkt Cap.: $353 MM
Shares Outst.: 21.2 MM 5 Yr Hist Rel P/E Rng NA
Debt to Cap 80% 99 Est ROE 7%
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*1998 excludes nonrecurring debt issuance amortization expense of $0.07 and
excludes an extraordinary loss of $0.14 for debt repayment.
KEY POINTS:
o Neff reported diluted EPS of $0.19 in the 2Q, in line with our estimate and
a penny better than the consensus estimate. The previously announced change
in rental depreciation rates added about $0.12 to 2Q EPS. But, Neff's rental
depreciation to rental revenues is still the highest in the industry.
o Revenues were also in line with our estimate, but SG&A was lower than
expected helping to push EBIT margins above our forecast. The major offset
in the quarter was a higher than expected tax rate, which trimmed about two
cents versus our estimate.
o The company said it is still comfortable with current Street estimates of
$0.24 for 3Q and $0.64 for 1999.
o We are leaving our consensus 3Q EPS estimate of $0.24 unchanged, and
maintaining our our 1999E, of $0.65 (a penny higher than consensus). Our
2000E is unchanged at the consensus of $0.80.
o Neff expects to be announcing the completion of their strategic evaluation
shortly. As mentioned before, these initiatives could include: a sale of all
or part of the company, a recapitalization, or a spin-off.
o Financial highlights of 2Q include a 40% increase in revenues, to $103
million, and a 53% rise in gross profit, to $38.3 million (37.1% of sales
versus 34.0%). SG&A was up 36%, but dipped to 17.2% of sales from 17.7%.
SG&A was below our expectation of $18.5 million or 18.0% of sales due to
better overhead cost absorption from the maturation of greenfield stores.
Neff expects to maintain this improved rate. Operating profit (EBIT)
increased 166%, to $17.9 million, equal to 17.3% of revenues versus 9.1%.
Interest expense rose 26%, in line with the 24% rise in debt (year over
year). The tax rate, at 38.2%, was above our estimate of 35% due to the
timing of tax credits from Argentina. Management believes the new normalized
range for the tax rate is 37%-38%. Minority interest was $0.6 million,
leaving net income of $4.2 million, or $0.19, on 21.9 million diluted shares.
o Total debt at the end of the quarter was $465 million versus $402 million
in 1Q. There is $60 million available currently on the revolving credit
line. Gross rental fleet was about $475 million, up 12% versus the first
quarter. Neff now has 94 locations in 18 states. Trailing 12 months EBITDA
is $125 million, proforma for acquisitions according to the company. EBITDA
in 2Q99 was $34.7 million, up 53%, and equal to 33.0% of sales versus 30.2%
last year. The higher margin mainly reflects better overhead cost absorption
from the maturation of greenfield stores.
o Neff acquired Alliance Equipement Corporation with 5 stores in Virginia and
less than $5 million in sales, from Rentex. The purchase price was about 4x
trailing adjusted EBITDA, which seems reasonable for an acquisition of this
size.
o In our view, this was a good quarter. End markets were strong except for
Argentina & Buckner, which were not a surprise. Despite the weakness in
Argentina, company operations in the region continue operate in line with the
plan with strength on the higher margin rental business continuing to offset
weakness from the distribution business. Rental rates, while mixed
regionally, are firm overall, and fleet utilization is up.
- Maintain Neutral rating. We feel the shares are fairly valued at current
levels, trading at a P/E multiple of 26x our 1999E and 21x our 2000E. This
is well above the rest of the rental equipment universe, which trades at a
P/E multiple 15x our 1999E and 12x our 2000E.
T a b l e 1
Rental Equipment Industry
Comparable Company Valuation
S t o c k P r i c e
P r i c e / E a r n i n g s ( 1 )
8 / 2 / 9 9 1 9 9 9 E 2 0 0 0 E
H e r t z C o r p . $ 4 9 . 1 3 1 6 . 2 x 1 4 . 8 x
N a t i o n a l E q p . S v c s . $ 1 0 . 9 4 1 2 . 4 x
9 . 5 x
N a t i o n s R e n t $ 6 . 6 3 1 2 . 7 x 9 . 7 x
U n i t e d R e n t a l s $ 2 7 . 2 5 1 6 . 6 x
1 2 . 6 x
Mean 14.5x 11.7x
N e f f C o r p . $ 1 6 . 6 3 2 6 . 0 x
2 0 . 8 x
(1) First Call estimates as of 8/2/99 |
