Why HSS Hire Group PLC Looks Set To Beat J Sainsbury plc

In a trading update today, HSS Hire Group (LSE: HSS) said the firm’s revenue grew 10% in 2015 compared to 2014, which hits the directors’ earlier guidance for revenue to sit between a range of 8% to 11% up.

Learning that a company’s performance is in line with management’s expectations is always a comforting outcome, and the market seems to like it because, at around 82p as I write, the shares are up about 3.5% today.

Trending up

The share price has been elevating since late November, and with good reason. Performance is on track and the firm’s valuation seems modest. City analysts following the firm expect earnings to balloon by 168% during 2016 and the forward price-to-earnings (P/E) rating sits at 12 or so. Meanwhile, the forward dividend yield runs at 2.3%, and those anticipated earnings look set to cover the payout a healthy 3.5 times.

When it comes to equipment hire firms, I worry about the inherent cyclicality of their businesses. However, HSS Hire Group reckons it enjoys a distinctive and differentiated market position by concentrating on the less cyclical ‘maintain and operate’ segments of the tool and equipment hire market, which is an activity that tends to carry on regardless of the economic weather.

The firm explains that the ‘maintain’ segment refers to customer activities such as refurbishments, improvements and repairs, while the ‘operate’ segment of the market includes facilities management, transportation and cleaning. That contrasts with the more cyclical activity of providing large plant and heavy machinery geared to construction activities in the ‘new build’ segment. So, my reading is that HSS Hire Group leaves much of the large plant hire to others in the industry.

That could be a strategy that helps propel the firm ahead of alternative investments such as J Sainsbury (LSE: SBRY) in the coming year and beyond.

Big change ahead

Despite my enthusiasm for HSS Hire Group I don’t think J Sainsbury will be a pushover in this contest. Yesterday’s news from the supermarket is that the firm has agreed key financial terms for its possible offer for Argos brand owner Home Retail Group.

Takeover proposals tend to be more enthusiastically received by shareholders of the company being acquired than the acquirer, and indeed Home Retail Group’s shares are up more than 50% since J Sainsbury first pitched its takeover proposal, while Sainsbury’s share price is flat. However, the deal looks good for Sainsbury to my eyes, and I hope it goes ahead, which now seems likely.

With the supermarket sector in such a fragile state, I reckon the stock market will want proof that Sainsbury can extract the synergies, cost savings and sales increases it hopes to from the combined operation, before and if the shares are re-rated. There could be a significant ‘digestion’ period as Sainsbury rearranges the combined store estate and hones its forward strategy before profits start to rise. So, for the time being, my bet is that HSS Hire Group will be the best performer on total shareholder returns in the year ahead.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.