New Acquisitions And Diversification Will Strengthen Future Market Position

Key Takeaways

• Strategic acquisitions and geographic expansion are set to boost revenue growth, operational efficiency, and market share.
  
• Improved fleet management and specialty product investments aim to enhance profitability, cash flow, and margin stability.
  
• Herc Holdings may face revenue and margin variability due to cyclical market exposure, interest rate impacts, and challenges with new investments.

Catalysts

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

• Herc Holdings is expanding through strategic acquisitions and opening new greenfield branches to increase market share and geographic density, which is likely to drive future revenue growth and efficiencies.
  
• The company is focused on enhancing its fleet mix and increasing CapEx on specialty products to capture share of wallet opportunities, improve fleet productivity, and support growth in high-margin rental sectors, potentially boosting net margins.
  
• Participation in mega projects and the diversification of customer and geographic bases provide incremental revenue opportunities, supporting revenue growth and margin stability even amid local market volatility.
  
• Efforts to improve fleet efficiency and manage fleet allocation will help drive operational performance and profitability, supporting long-term earnings growth as newly acquired locations mature.
  
• Herc's focus on improving used fleet sales channels and optimizing fleet dispositions can enhance cash generation and asset efficiency, potentially improving net margins and supporting EPS growth.

Herc Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Herc Holdings's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $569.1 million (and earnings per share of $18.84) by about December 2027, up from $348.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2027 earnings, up from 15.9x today. This future PE is lower than the current PE for the US Trade Distributors industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 2.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.87%, as per the Simply Wall St company report.

Herc Holdings Future Earnings Per Share Growth

Risks

• The company faces potential risks related to a slowdown in local market project starts, attributed to high interest rates, which could affect its future revenue growth.
  
• New acquisitions and greenfield branches are generating lower incremental margins initially, impacting near-term profitability and net margins.
  
• M&A and greenfield investments may lead to efficiency challenges, which could hinder return on invested capital (ROIC) and earnings improvement.
  
• High levels of capital expenditures to support fleet growth might pressure cash flows and earnings, especially if demand projections do not materialize as expected.
  
• Given the current macroeconomic uncertainty, Herc's exposure to cyclical end markets could lead to variability in revenue and margins.

Valuation

• The analysts have a consensus price target of $248.67 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 $150.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.2 billion, earnings will come to $569.1 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 8.9%.
• Given the current share price of $195.0, the analyst's price target of $248.67 is 21.6% 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.