Expanding Into Mega Projects And Specialty Fleet Services To Harness Future Growth

Key Takeaways

• Herc Holdings' expansion through new branches and acquisitions is set to enhance market share, revenue growth, and operational efficiency in key areas.
  
• Focus on specialty fleet investments and optimizing logistics is anticipated to improve net margins, support mega project demand, and boost earnings.
  
• The slower-than-expected sector recovery and local market challenges may constrain revenue growth, net margins, and earnings, amid rising acquisition and borrowing costs.

Catalysts

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

• Herc Holdings has been expanding through greenfield locations and acquisitions, opening 23 new branches and adding 28 locations through acquisitions in 2024, which is expected to drive market share and revenue efficiencies in key metropolitan areas. This expansion is likely to impact future revenue growth positively.
  
• The company is increasing its investments in specialty fleet CapEx to cross-sell expert solutions, capture share of wallet opportunities, and support incremental demand for mega projects. This strategy is anticipated to boost net margins by enhancing the mix of higher-margin services.
  
• Herc Holdings is focusing on optimizing fleet efficiency and logistics to improve operating productivity and pricing optimization, a move that should enhance earnings through cost savings and better resource management.
  
• The anticipation of strong growth signals for mega projects in LNG, data centers, semiconductors, healthcare, education, and infrastructure in 2025 is expected to drive rental revenue growth by outpacing overall industry growth, thus positively impacting the revenue line.
  
• The strategic focus on supporting acquisitions and greenfields to reach full margin potential in a challenging local market aims to ensure long-term profitability. This approach is likely to improve net margins and return on invested capital (ROIC) as newer locations mature and become efficient.

Herc Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Herc Holdings's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 17.9% in 3 years time.
• Analysts expect earnings to reach $734.0 million (and earnings per share of $20.24) by about March 2028, up from $211.0 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 11.6x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the US Trade Distributors industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.5%, as per the Simply Wall St company report.

Herc Holdings Future Earnings Per Share Growth

Risks

• The impact of Cinelease's slowdown and its pending sale, due to the weaker-than-expected recovery of the studio entertainment sector, might negatively affect the company's net margins and overall earnings.
  
• The performance of local markets is slowing, particularly those sensitive to interest rate increases, which may lead to reduced revenue growth potential.
  
• The integration and maturation period for new acquisitions and greenfield locations, which can take up to 36 months to reach full margin potential, may result in short-term inefficiencies affecting net margins and return on invested capital (ROIC).
  
• Increasing interest expenses due to higher borrowings for acquisitions and rental equipment may constrain earnings and reduce net income.
  
• Challenges in achieving expected fleet efficiency and utilization due to local market slowdown could impact revenue and net margins if the anticipated improvement does not materialize.

Valuation

• The analysts have a consensus price target of $226.111 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 $294.0, and the most bearish reporting a price target of just $129.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.1 billion, earnings will come to $734.0 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 10.5%.
• Given the current share price of $127.97, the analyst price target of $226.11 is 43.4% 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.