Digital Shifts And Heavy Debt Will Curtail Fleet Utilization

Key Takeaways

• Accelerating industry digitalization and green regulation threaten Herc's traditional fleet strategy, requiring costly adaptation and risking utilization and profit margins.
  
• Heavy reliance on debt for acquisitions and tough competition from digitally advanced rivals could constrain cash flow and erode long-term profitability.
  
• Robust demand from large infrastructure projects, strategic acquisitions, and market diversification are positioning Herc for sustained growth, stable earnings, and improved margins amid industry shifts.

Catalysts

Operates as an equipment rental supplier in the United States and internationally.

• As the construction industry undergoes rapid digitalization with modular building, 3D printing, and AI-driven automation, the reliance on traditional heavy equipment rentals could decline substantially, threatening Herc Holdings' long-term fleet utilization and top-line growth.
  
• Intensifying pressure to transition toward lower-emission, green, and highly automated equipment-driven by evolving regulations and decarbonization goals-could force Herc Holdings to make significant, ongoing capital investments just to keep its fleet relevant, raising CapEx and compressing both returns on invested capital and earnings.
  
• Herc's pursuit of growth through large-scale acquisitions, such as the pending H&E Equipment Services deal, amplifies its already heavy dependence on debt; persistent leverage elevated above three and a half times EBITDA, especially in a high-interest-rate environment, could materially constrain free cash flow and erode net margins for years after closing.
  
• With industry consolidation and large players like United Rentals increasing their digital offerings, Herc faces escalating competitive pressure, and the risk of margin erosion or the loss of pricing power, all of which threaten long-term profitability and revenue stability as customers gain more purchasing options through online-first platforms.
  
• The anticipated multi-year mega project tailwind is highly exposed to regulatory, technological, and financing shifts; if infrastructure digitalization and direct procurement become standard, Herc could face ongoing volatility in rental demand and ultimately lower revenue growth.

Herc Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Herc Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Herc Holdings's revenue will grow by 15.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.5% today to 11.6% in 3 years time.
• The bearish analysts expect earnings to reach $644.4 million (and earnings per share of $18.38) by about July 2028, up from $128.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, down from 31.2x today. This future PE is lower than the current PE for the US Trade Distributors industry at 20.1x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.69%, as per the Simply Wall St company report.

Herc Holdings Future Earnings Per Share Growth

Risks

• Continued multi-year growth in mega infrastructure, manufacturing, and industrial projects across North America is supporting robust demand for equipment rentals, underpinning long-term revenue expansion for Herc Holdings.
  
• The company's successful integration of numerous acquisitions and the pending H&E Equipment Services deal are expanding Herc's geographic footprint and specialty fleet capabilities, which is likely to drive incremental market share and margin improvement in the coming years.
  
• Diversification across national and local accounts, specialty equipment, and end markets has made Herc less sensitive to cyclical downturns in any single sector, which should help to stabilize earnings and support resilient profit margins.
  
• Secular shifts favoring equipment rental over ownership, especially in high-margin specialty categories, are increasing Herc's addressable market, boosting revenue potential and offering protection against economic slowdowns.
  
• Proven ability to manage leverage and strong free cash flow generation, even in volatile or acquisition-heavy environments, position the company well to improve net margins and earnings, while maintaining financial flexibility for future growth.

Valuation

• The assumed bearish price target for Herc Holdings is $100.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Herc Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $285.0, and the most bearish reporting a price target of just $100.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.6 billion, earnings will come to $644.4 million, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 10.7%.
• Given the current share price of $140.25, the bearish analyst price target of $100.0 is 40.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.