Herc Holdings Earnings: Our Demand Outlook Is Largely Unchanged

Herc HRI reported solid third-quarter earnings, thanks to stable rental demand in North America. Our fair value estimate increased 2% to $143 from $140 previously, mainly due to the time value of money since our last update.

The rental industry continues to normalize following recent supply disruptions. Last quarter, the company was challenged by a shutdown in the entertainment business due to a labor strike. That headwind continued into the third quarter, leading to 110-basis point decline in Herc’s adjusted EBITDA margin compared with the same period a year ago. Excluding entertainment, the company’s adjusted EBITDA margin was down 60 basis points, largely due to increased sales of lower margin used fleet.

Rental revenue was up 13% year on year (excluding entertainment), thanks to strong pricing and volume gains. Like recent quarters, pricing continues to be an important driver to sales, increasing nearly 7% year on year. The tight supply environment has been a key catalyst to higher pricing, but so, too, has the shift from equipment ownership to rental. By renting, contractors can boost profitability and can be much nimbler from project to project.

Looking ahead, our demand outlook for 2024 remains positive. While 2023 will prove to be a tough comparison period, we think new U.S. infrastructure spending will create demand for Herc’s rental equipment. For 2024, we project sales to grow by nearly 7%, while adjusted EBITDA margin remains flat at around 45% mainly due to price normalization.

Management announced it’s open to strategic alternatives for its studio entertainment, lighting, and grip equipment business, Cinelease. The company believes it would need to own studio real estate to grow the business. This would require the company to deviate from its core operations. That said, Herc still plans to rent other products to the entertainment industry, such as aerial lifts, generators, forklifts, and other general equipment.