H&E Integration And Targeted CapEx Will Improve Fleet Operations

Key Takeaways

• Herc Holdings' growth is supported by integrating H&E Equipment Services, enhancing revenue, geographic coverage, and fleet efficiencies.
  
• Investment in specialty fleet CapEx and proprietary technology boosts high-margin revenue, operational efficiency, and long-term earnings potential.
  
• Integration of a significant acquisition and interest rate challenges could pressure margins and growth, while tariff concerns and local market weaknesses pose risks to revenues.

Catalysts

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

• Herc Holdings is poised for significant growth through the integration of H&E Equipment Services, which is expected to enhance its revenue and fleet efficiencies due to expanded scale and geographic coverage. This is likely to positively impact revenue growth and fleet utilization.
  
• The company's strategy includes a focus on increasing specialty fleet CapEx to address urgent and critical customer demands, which serves to boost high-margin specialty rental revenue and improve the overall profitability mix.
  
• Herc's continuous investment in proprietary technology and internal applications for better fleet management and customer service is expected to increase operational efficiencies, potentially enhancing net margins and earnings.
  
• With substantial government and private funding, large construction projects in sectors such as data centers, manufacturing onshoring, and LNG facilities are anticipated to drive rental revenue. The ability to capture 10% to 15% of these mega project opportunities is expected to contribute materially to revenue growth.
  
• A targeted approach to fleet CapEx, focused on maximizing fleet productivity and aligning with demand trends, indicates a disciplined capital management strategy aimed at optimizing return on investment and supporting long-term earnings growth.

Herc Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Herc Holdings's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 16.9% in 3 years time.
• Analysts expect earnings to reach $654.0 million (and earnings per share of $24.94) by about April 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 analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 24.0x today. This future PE is lower than the current PE for the US Trade Distributors industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.01%, as per the Simply Wall St company report.

Herc Holdings Future Earnings Per Share Growth

Risks

• The macroenvironment shows divergent trends with strength in large national accounts but challenges in the local market due to prolonged elevated interest rates, which could impact local revenues.
  
• Integration of the large H&E Equipment Services acquisition is the focus over the next few years, with pauses to other M&A, indicating potential operational and capital allocation risks that could affect net margins.
  
• Concerns about tariff impacts on customers' procurement costs, despite reassurance of little direct effect on Herc, could introduce uncertainties surrounding future revenue forecasts.
  
• The local market is currently weak with interest rate-sensitive projects on hold, which limits growth in smaller local accounts and presents risks to future revenue streams.
  
• The latest financial results demonstrate pressure on adjusted EBITDA margin and slow growth in important aspects such as fleet utilization efficiency, which could impact overall earnings growth in the near term.

Valuation

• The analysts have a consensus price target of $180.1 for Herc Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $654.0 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 11.0%.
• Given the current share price of $107.6, the analyst price target of $180.1 is 40.3% higher.
• 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.