Herc Holdings Earnings: Market Sours on Earnings, but We Think 2023 Will Still Be Positive

Herc Holdings’ HRI stock fell nearly 4% in intraday trading on July 25, following second-quarter earnings. We believe the market reacted negatively to the company missing FactSet consensus estimates for both sales and earnings per share. However, we didn’t think the miss was big enough to get concerned about the balance of the year. In our view, Herc is still poised to grow both its top and bottom lines by over 20% in 2023, and we leave our $140 fair value estimate unchanged.

A lot of the themes we’ve highlighted in previous quarters are still in play. Rental demand is still running at a solid level, which allowed the company to grow rental revenue by 16% year on year. Pricing continues to be an important driver to sales, increasing nearly 8% compared with the same period a year ago.

We agree that improving supply chains will lead some construction contractors back to original equipment manufacturers, but there’s a competing trend forming. Contractors have increasingly opted to rent intermittently used equipment as opposed to owning them outright. By renting, contractors can boost profitability and can be much nimbler from project to project. Management cited during the quarter that the North American equipment rental market grew approximately 8% year on year. The company also pointed to industry estimates that call for the rental market to grow approximately 7% in 2023. This backdrop gives us confidence to forecast a strong year in 2023.

Management also made a point to highlight the entertainment business, which is currently challenged due to the labor strikes in the entertainment industry. The company doesn’t expect the balance of the year to be much better. Entertainment represented 2% of sales in the quarter versus 5% in the year-ago period. The strike is a headwind but a small part of Herc’s overall business. Excluding entertainment, we feel good about Herc’s long-term prospects, especially with infrastructure spending expected to ramp up soon.