2006 Business Outlook: Smooth Sailing Ahead - Business Outlook
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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SECTION: Business Outlook

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2006 Business Outlook: Smooth Sailing Ahead

Written By Pam Gruebnau

Article Date: 01-01-2006
Copyright (C) 2006 Associated Equipment Distributors. All Rights Reserved.

Dealers had a great 2005 and they’re expecting more of the same in 2006.

2005 was a banner year for most dealers and, based on a December 2005 survey of AED dealers on their forecasts for 2006, most are expecting continued growth in 2006. In response to the survey, 80 percent of dealers said they were forecasting an increase in revenue in 2006 compared to 2005. Only 4 percent expect sales to drop.

As in 2005, both Heavy equipment dealers (majority of equipment sold is 100 hp plus) and Medium dealers (majority of equipment sold is less than 100 hp) are optimistic about the coming year: 83 percent of Heavy dealers and 83 percent of Medium dealers are predicting increased sales in 2006. The percentage for all dealers is lower (80 percent) because of the less upbeat forecasts from Specialized dealers (engines, and material-handling and industrial equipment). While only 11 percent of Specialized dealers are forecasting a decrease in business in 2006, just 44 percent say they expect an increase in revenue.

The positive outlook Heavy and Medium dealers expressed is consistent with CIT's just-released 2006 Construction Industry Forecast. In August and September 2005, CIT conducted telephone surveys of more than 900 contractors and equipment distributors to develop a 2006 forecast and their Optimism Quotient (OQ).

Although the OQ for the coming year fell 7 points compared to a year ago - from 109 to 102 - this marks the third consecutive year it's been above 100 which, CIT says "indicates a positive road ahead for the construction industry and the U.S. economy."

New & Used
In 2006, 68 percent of dealers are expecting increases in new equipment sales, and 65 percent think used equipment sales will continue to climb. 

This optimism is certainly borne out by CIT's Forecast: "About half of the contractors who took part in the forecast plan to buy construction equipment next year, up significantly from the 44 percent who expected to buy equipment in 2005." 

Given the increase in contractors' plans to buy from last year to this and the great year most dealers had this year, we may find 2006 is an even better year than dealers are planning.

Gross margins on new equipment, however, aren't expected to improve; only 24 percent of dealers think gross margins on new equipment will be better in 2006.

Despite the lack of improvement in gross margins on new equipment sales, more than 50 percent of dealers say they'll invest more in new equipment inventory in 2006 compared to 2005: 25 percent will increase inventory 6 percent or more. Fifteen percent plan to cut their new equipment inventories. (The CIT study found 52 percent of dealers planning to add to their inventories in 2006.) 

About 32 percent of dealers are reporting a problem with excess inventory now up from 16 percent a year ago; 28 percent have less excess inventory than a year ago and 40 percent say excess inventory is not a problem.

About the same number of dealers are expecting used equipment sales to climb in 2006 as expect new equipment sales to climb. However, more dealers think gross margins on used equipment will climb in 2006; 37 percent are forecasting increased gross margins on used equipment next year.

"Contractors prefer to use their own equipment whenever they can," says CIT, "but they expect to meet 16 percent of their equipment requirements with rented equipment" in 2006.

And dealers are predicting equipment rental will continue strong in 2006, with 72 percent expecting increased rental revenue. 

According to CIT, 55 percent of dealers and 66 percent of contractors expect rental rates to be higher in 2006. Even with expectations of higher rental rates, only about one-third of dealers think gross margins on rental will increase.

However, to meet the increased demand, 70 percent of dealers plan to invest more in their rental fleets than they did in 2005, 23 percent will invest the same amount, and just 7 percent will invest less. More than one-third of dealers will increase investment in their rental fleet by 6 percent or more.

Parts & Service
Dealers are very optimistic about parts sales in 2006: 84 percent expect parts sales to climb next year and 16 percent think parts sales will continue at 2005 levels. No dealers are forecasting a decrease in parts sales in 2006.

Most dealers (66 percent) expect parts gross margins to stay the same as in 2005; although 32 percent
are forecasting an increase in parts margins.

And service sales are the brightest star on the horizon: 88 percent of dealers are forecasting an increase in service sales in 2006 and 12 percent expect a repeat of 2005 service sales.

As for service gross margins, nearly 50 percent of dealers think they'll see increases in gross margin on service sales, while 48 percent think margins will continue at 2005 levels and 3 percent are expecting a decrease in margin.

Dealers Will Hire In 2006
While 63 percent of dealers responding to the Business Outlook survey at the end of 2004 said they planned to add staff in 2005, 79 percent actually did so. For next year, 69 percent are already expecting to need additional personnel.

Key Concerns
While the outlook for 2006 is very positive, dealers still have concerns. Asked to list conditions they felt would negatively impact the coming year, most dealers mentioned a slow down in housing and the invariably linked higher interest rates. Still signs of a great year to come are undeniable. Said one dealer, "2005 was the best year in 10 years. 2006 has to be worse, but I hope not!"

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