With uncertain times comes market stress. In such periods, it becomes critical for stakeholders to put a watchful eye on key metrics and market trends.
In this update, Rouse provides equipment industry stakeholders with helpful direction on the key factors for consideration – while some may be company (credit) specific, others represent broad market characteristics. A careful examination of these topics will begin to reveal the story for the latest market trends and may help identify the key inflection points.
Secondary Market Activity
Secondary market activity is ultimately the best source of information for understanding trends in collateral values. Many stakeholders have been surprised to learn that second-hand buying and selling of construction equipment has been quite robust amid the prevailing uncertainty from March through May of 2020. With a closer examination of this activity, one should focus on two key attributes:
i) Pricing achievements – willingness and ability to pay will no doubt be a sign of the times and can provide a gauge for demand through challenging market environments.
ii) Sales volumes – along with pricing trends, selling volumes (i.e. unit sales) should be weighed into the thought process. Fluctuations in volumes could provide insight into supply and demand across different sales channels, but nonetheless should be closely monitored in order to accurately identify the trends in the market.
Within the context of a rental business, physical utilization can serve as a true and real-time indicator for demand. Stakeholders should be keen to monitor this on a standardized measure while adjusting for seasonality and geographic market and drawing comparisons to utilization achievements in prior years.
OEM & Dealer Activity
During periods of market weakness, it is not uncommon to see manufactures and dealers demonstrate reduced production activity and reduced sell-through of new stock as demand begins to decelerate. While manufacturers can be swift in adapting to declines in demand by cutting production, as demand for equipment returns there may be a supply constraint on account of production lags. This phenomenon may lead to a short-term supply and demand imbalance that can, in turn, lead to an improvement in pricing for used equipment as buyers turn to secondary markets to acquire products needed to fulfill their construction projects.
Equipment rental companies and other users of construction equipment tend to be responsive to changes in the market by reconfiguring their capex plans quickly as changes begin to develop.
In recent times, many companies have significantly reduced their capex budgets for the year. As this takes hold, the replacement cycle becomes impacted as rental companies will look to reduce net new purchases and instead manage the fleet they have – either in the form of disposing older and underutilized assets or by allowing the fleet to age out. As a result of this phenomenon, stakeholders should be watchful of fleet age (in comparison to industry benchmarks) as well as changes to maintenance spending and the percentage of down-line machines.
For more detail on any of these topics, please reach out to your Rouse representative to set up time for a deep dive on the latest market developments.