A Cautious Rental Strategy

A Cautious Rental Strategy

January 5, 2012

Rental is on the rise as an asset-management strategy. According to the December 2011 Rouse Rental Report, published by Rouse Asset Services, both sales and values of used rental equipment are up. Values rose throughout the year, with the November number up 7.3 percent over May. Rouse labels it “orderly liquidation value,” which is a percentage of the replacement cost garnered when a rental firm or dealer disposes of a machine at a certain average age.

Rouse tracks how rental and dealer houses dispose of their fleets, but these numbers can serve as a directional tool for the equipment manager. As an indicator of current market activity, this upward trend reflects an increased demand for used rental equipment, and, we presume, fresher iron to replace it in the rental fleet. This does not surprise us; used equipment and short-term rental have been strong acquisition strategies for months as fleet managers supply iron for projects that are shorter in term and with fewer jobs in the pipeline.

We would suggest that the numbers also reflect recent increases in construction spending as the housing market recorded some upticks. Instead of rushing to acquire new machines and spend scarce capital on iron, fleet managers are using rental to acquire machines for a more controlled rampup. If the projects do come, and the pipeline does start to fill, the strategy will change.

The upward trend in rental numbers can also be used as a motivator instead of an indicator. Fleet managers looking at 2012 construction see active and fresher rental fleets and will add short- or even long-term rental as an acquisition strategy. The risk is certainly reduced when the rental house or distributor handles preventive maintenance, shop overhead, and compliance costs.

 

Andy Agoos makes a strong case for rental as a strategy in “Equipent Executive.” The recent purchase of RSC by United Rentals lends credence to the idea that the rental industry is heating up. The deal sets up a large-scale equipment rental company with strong growth potential.

Before running headlong into rental, however, exercise some caution. All indicators are solid; rental is a viable and cost-effective strategy. Returning to the Rouse data, orderly liquidation value takes into account average machine age at disposal. That, too, has been increasing over the past year. In November, average selling age for all machines tracked by Rouse was 5.5 years. Of course, old machines may be replaced by new ones, and this is a time-based measurement rather than a usage-based one, such as operating hours. But asset managers must consider machine quality when renting.

Check engine hours, verify PM history, and consider an uptime guarantee on rented equipment. Rental will make a strong play as a viable acquisition strategy in coming months; an asset manager owes it to his organization to field the most reliable machine for the job.

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