Highway Contractor

Sourcing used equipment?

It’s complicated

By Mike Anderson

It’s debatable whether it’s a good time to buy or sell used equipment, or both, but it’s clear the game has changed

It’s a Thursday morning in mid-April when a 2008 Caterpillar D8T dozer crawls off the Ritchie Bros. auction ramp in Connecticut, having fetched a top bid of $322,500 from a buyer on site. Over the following three minutes, three 2008 D6 tractors follow at closing bids ranging from $125,000 to $182,500.

Big deal, right? A scene repeated many days throughout the country, the continent and, heck, the world, right? Perhaps. But that’s actually what makes it significant . . . and, given where the industry has been the previous two years, maybe even a big deal.

This isn’t Florida in February, where and when the construction equipment industry’s mega-auctions ritualistically kick off the new season and, according to Rouse Asset Services, attract a popularity reflected in an annual spike in sales prices. This is two months later, more than 1,200 miles north, and yet the used iron is still moving and fetching noteworthy selling prices.

Depending on who you ask, the used equipment market is back, even robust. The sentiment isn’t universal, and even somewhat optimistic observers say results are mixed, depending on the particular sector being served, but the overall feeling is we’re not where we were 18 months ago . . . and that’s OK.

“From strictly an equipment-value standpoint, there’s absolutely no question that the prices people are exchanging equipment at today are higher in a relative sense than where they were even a year ago,” says Gary McArdle, Rouse vice president. For relative comparables, such as a 2007 piece up for sale this year versus a 2006 model up for sale 12 months earlier, the values have increased by 8 to 12 percent in the lifting and mainstream construction product types chronicled by Rouse, says McArdle. “That’s just pure data,” he says. “It’s absolutely a better time to sell than it was a year-and-a-half ago.”

That may be, says Kurt Tisdale, general manager of Caterpillar Used Equipment Services, but it’s a “much more complicated” used equipment landscape today. “There is a lot of variability in the equipment quality out there.” The slowdown in work may have aged some equipment more gently and gracefully, says Tisdale, but at the same time, “a lot of customers weren’t able to do the maintenance that they historically have been doing, so you may be looking at a machine of comparable age and hours, but internally and externally may be significantly different in quality and capability. It’s a lot more complicated now to find that good deal, both on the buying and selling side, especially when we see the prices every month just going up and the supply of good equipment getting shorter and shorter.”

The challenge for contractors and agencies on the hunt for a good used iron buy is do their “homework” first, says Caterpillar’s Tisdale. “There’s a tremendous amount of data and information out there in the marketplace. Most of it’s on the Internet in the form of pricing. You can find all sorts of sites where you can see what a machine with certain model year and age brought at auction or is being marketed at by a broker, but you really can’t tell what that machine is like without thorough inspection, history of service, history of repairs, etc.” He lists some key questions for which answers are needed:

• “Was the piece repaired with original equipment manufacturer (OEM) parts and service capabilities?” In other words, “Is that undercarriage going to be living like the original one did?”

• “Are the hours correct?”

• “Is the machine designed to meet the requirements for the area in which the customer plans to use it?”

“There are many machines that have been sold across regions of the world that may look like they’re the same model, but were really designed for specific regions that have unique customer specification needs and regulatory requirements,” explains Tisdale. “When you throw in the things like the emissions changes and unique configurations around the world, you really have to do your homework. You can’t just look at the age, the hours and the price, and say, ‘It’s worth this.’ You’ve got to have more knowledge and information.” Again, questions that require answers:

• “What region of the world was the machine originally delivered to?”

• “What was the original configuration?”

• “Does any component replacement, repair or maintenance history exist?”

• “What was the original emissions level?”

“Really study the machine closer,” advises Tisdale, “because I see more variability in quality than I ever had, since a lot of the late-model equipment is just not available. The past three years, especially in North America, the dealers really have not put many new machines into the rental fleet. The rental fleets are a third smaller than they were three years ago and they’re nearly twice as old. When you add in what machines were on the market the past couple of years, a lot of those migrated to other parts of the world via auctions or brokers,” he says. “And now that the North American market is picking up, the customers’ choices are more limited and there’s just a lot more older equipment than before. With older equipment, you have to start asking even more questions including, ‘Do we know how many times this machine has changed ownership?’”

Good Times, Bad Times

So, we ask, is it a good time to be a buyer or seller of used equipment?

It’s a good time to be a seller, says Alastair Robertson, president and founder of Universal Equipment, which buys predominately lifting equipment in the United States and sells it overseas. “If you’ve got equipment to sell, I would say, ‘Go to the auctions, NOW!’ There are fewer and fewer machines at the auctions and the prices are definitely going up. It’s a good time to sell stuff, if you’ve got it and don’t need it.”

Chuck Yengst, president of machinery market research analyst for Yengst Associates, admits he’s often on the opposite side of prevailing consensus on issues related to the equipment industry. “Oh yeah, it’s a buyer’s market,” he says. “It’s like the housing market. Ask yourself if it’s a good time to be a seller of a house or a buyer of a house. It’s the same damned thing.

“A lot of people would like to say things are just turning around like crazy,” Yengst continues. “In this country and in North America period, there are some little bright spots here and there, but if you also study it, you see there’s no real market for construction machinery. You know they’re not putting in super new buildings and highways. We’re at a hiatus, you might say, in construction, because housing is going nowhere.”

In the wake of CONEXPO-CON/AGG 2011, “I’m that one contrarian, I think, who is not living under that euphoria. I guess I’m a little on the negative side,” says Yengst, “because I don’t see how we can keep going like this with everybody yelling, ‘Hoopla,’ when there is nothing happening in the real world. I want to start seeing housing starts moving and I want to see money being spent on things other than repaving a road here and there. I want to start to see buildings going up, and factories and schools and everything else. I don’t see any of that stuff, and I’m saying, ‘What are you people doing? This is a shell game you’re pulling on me here.’”

As for potential sellers, “they all don’t want to get rid of the best used equipment they’ve got,” especially at auction, says Yengst. “The one thing that they’ve got going for them is to hang onto the stuff and move it if a customer comes to the front door. However, you won’t find dealers holding onto this stuff forever, if cash flow starts to be a problem.”

Caterpillar’s Tisdale says the market is ripe for those wishing to add, turn over or reduce fleet. “This may sound like a political answer, but we’re in a unique period when it’s actually a very good time to both buy and sell,” he says. “It’s a good time to sell because the prices have recovered nicely from what was a historical low about a year-and-a-half ago, when we had what I’ve seen as the lowest used equipment prices in probably 20 years. Many of our product families and models have recovered 20, 30 and 40 percent on pricing in that time frame since, so from that aspect, if you have idle equipment that you don’t need, it is a very good time to move it. But it’s also a good time to buy, because high demand for new machines makes immediate availability a challenge. Many of our models and our competitor models are extended on the delivery of the new machines, so if you’ve got work to do, you really have to consider what is available in the used market and consider refurbishing, repairing and upgrading a used machine just to take advantage of your projects. The other thing to consider is what technology and regulatory issues do you need to meet today’s business requirements and challenges.

“As Tier 4 is being launched,” says Tisdale, “the flow and disposal of used equipment is going to change. Machines won’t be able to operate or move as freely around the world as they historically have.” At the same time, older Tier 2 or 3 machines that in times past an owner might not have considered having may, in fact, be the best choice for some customers for years to come, either making it worth holding onto or even searching for to add.

“We are constantly looking for machines,” says broker Robertson. “It’s a struggle to find machines, at the right price, because of course all these guys wanting to buy remember the prices two years ago when everything was dirt cheap.”

Rationale, reasoning and conclusions may be debatable, but there are indisputable facts about today’s used equipment market, says Rouse’s McArdle. Equipment values are up and the nine largest equipment rental companies are showing increased utilization and rates, he says. At the same time, “every report we see shows construction spending was down in 2010 over 2009,” he adds, “and, of course, 2009 was down over the peak in 2007.” The first meaningful increase in construction spending in the U.S. is projected in 2012.

Boosted values, usage and rates in the face of decreased spending? “I would argue that no one could tell you for certain why that is,” says McArdle, but he has a theory. “As equipment falls out of service, whether you are an end-user contractor or the rental companies themselves, you need to be able to replace it . . . or find another piece of equipment that you can put into service to be able to do the jobs that you have. There’s fewer jobs, but you still need to have equipment to service the work that you have.

“If newer equipment is going to represent a larger investment, then maybe you want to look to used equipment first,” adds the Rouse Asset Services vice president. “If you have less visibility into where your future work is going to come from, but you do have a job today that you need to put equipment to work at, then maybe you want to rent instead of purchasing that new piece because you don’t know if you’re going to have work for it three months from now or a year from now.”

Yengst says he does try to be optimistic, but “this is really the saddest damned thing I’ve ever seen. It’s the hardest time I’ve ever had in my life, trying to talk about markets. Some people really are trying to make something out of nothing right now, and I take my hat off to a few of them because they are succeeding at it,” he says. “When you really get down to the nitty gritty, the rubber on the road kind of thing, we’re in a very serious problem and we’re not coming out of it very well or very fast. It is just such a tough, tough market to be in – and a hard one to talk about – other than I think we’re going to get some relief as we go along, but it’s going to be slow.”

His advice on disposable fleet? “Hang on to it, if it works, if it’s functional. If it’s not totally rusted out and a real problem from a maintenance standpoint, hang on to it,” he says. “Eventually, if you feel that you need to get rid of it, it certainly is not going to get beat up anymore than it already is, if it’s just sitting there. As long as you don’t have a really serious cash flow problem – and you’re not going to get that much out of it anyway.”

Others would argue that.

Exactly two weeks before that Ritchie Bros. auction in Connecticut, an Ontario-based buyer bought a 2004 Caterpillar D7R XR II crawler tractor at a web-exclusive IronPlanet auction for $172,000. From an opening bid of $100,000, the dozer was on the clock for 12 minutes and drew 32 bids. Good deal compared to the crawlers that moved at the later Ritchie Bros. auction? Impossible to say, absent detailed machine information, but it’s undoubtedly something to ponder for sellers and buyers alike.

Who can you trust?

He’s biased, he admits, but “the OEM’s dealer is your most trusted source” on used equipment, says Kurt Tisdale.

“Whether it is us or our competitors,” says the general manager of Caterpillar Used Equipment Services, “the authorized dealers have access to the technical information, and they have access to more of the warranty and history of repairs and maintenance than anybody else.”

His advice to fleet managers looking at the used market to add pieces is “to just be very careful when you see a nice paint job on any machine – to dig deeper.

“We’ve often found that a nice paint job is hiding something of concern,” he says, “but in the hurry to take advantage of a deal, it may influence a buyer’s decision more than it should. There are a lot of things to consider in that used purchase or sale. It’s not just the price. You really have to dive into what it’s going to cost on the make-ready and the repairs, the transportation time and expense, and the commission.”

Thorough inspection is key, says Tisdale. “It really comes down to trust with whomever you are in business with. I’m biased and believe the OEM dealership has that long-term trust with the contractor and the customer, and can provide information that’s really needed to make a wise decision. The machines are also a lot more sophisticated than they were a few years ago. With that sophistication comes the need to have a trained technician to be able to really diagnose and understand what we’ve got there.”