What a fantastic six months it’s been for H&E Equipment Services. Shares of the company have skyrocketed 68.9%, hitting $89.72. This performance may have investors wondering how to approach the situation.
Is now the time to buy H&E Equipment Services, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Despite the momentum, we're cautious about H&E Equipment Services. Here are three reasons why we avoid HEES and a stock we'd rather own.
Why Is H&E Equipment Services Not Exciting?
Founded after recognizing a growth trend along the Mississippi River and opportunities developing in the earthmoving and construction equipment business, H&E (NASDAQ: HEES) offers machinery for companies to purchase or rent.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Regrettably, H&E Equipment Services’s sales grew at a sluggish 2.4% compounded annual growth rate over the last five years. This was below our standards. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect H&E Equipment Services’s revenue to rise by 2.1%, a deceleration versus its 13.8% annualized growth for the past two years. This projection is underwhelming and suggests its products and services will face some demand challenges.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, H&E Equipment Services’s margin dropped by 22.1 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. H&E Equipment Services’s free cash flow margin for the trailing 12 months was 6.4%.
Final Judgment
H&E Equipment Services isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 22.2× forward price-to-earnings (or $89.72 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of H&E Equipment Services
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