Herc Earnings: Top-Line Growth Continues, Thanks to Solid Rental Demand

Herc Rentals HRI reported solid top-line growth in the first quarter. Rental revenue increased 24% year on year, thanks to strong demand. Customers have been pushed to the rental channel over the past couple of years, given the supply constraints in new equipment manufacturing. The tight supply market has certainly been challenging to navigate, but Herc has proved to be resilient. Herc and the large rental players have worked hard to acquire fleet to meet demand. Over time, we expect rental demand to moderate, but 2023 is still shaping up to be a strong year. We’re projecting Herc to grow sales by 19% year on year, while operating margins expand by 130 basis points to 21.7%.

Looking further out, we think Herc can grow sales by 7% on average through 2027, thanks to stronger commercial, industrial, and infrastructure spending. The company called out national and mega projects in the U.S. as a source of current strength—and add on top of that the new infrastructure spending that’s expected to come online in the next year or two. This leads us to believe Herc is well positioned to grow earnings. From 2023-27, we forecast 10% earnings per share growth on average. In our view, the other secular growth driver is increasing rental penetration. Renting equipment is more cost effective than owning intermittently used equipment outright.

We currently view Herc’s shares as undervalued. In our view, the current stock price implies Herc’s shares are 33% undervalued. The market sent the company’s shares down approximately 5% in intraday trading. The company’s EBITDA margin did decrease slightly by 10 basis points compared with the same period a year ago. We aren’t discouraged by this and continue to think Herc can increase its EBITDA margin to 45.7% in 2023, up about 90 basis points. All signs are pointing in the right direction, demand remains solid, rental penetration is increasing, and increased infrastructure spending should prove to be a tailwind for Herc.