Herc Sets New Revenue and Adjusted EBITDA Margin Targets at Its Investor Day

We raised our fair value estimate by 6% to $152 (from $143 previously), following Herc’s HRI recent investor day. Key changes to our cash flow model included upward adjustment to rental revenue and adjusted EBITDA from 2024-26. On an organic basis, Herc believes its rental revenue compound annual growth rate will land between 10%-14% from 2024-26, assuming outsize growth compared with the rental market. In order to outgrow the rental market, Herc will need to grow its fleet, expand further into specialty fleet, and penetrate urban markets further.

Herc has shown good progress on each of these points over the past few years. However, we think the company will have to contend with stiff competition from its top competitors and cyclicality. This leads us to believe revenue and EBITDA growth will match management’s middle-case scenario, which assumes Herc grows at twice the rate of the rental market. In this scenario, Herc projects a 6%-8% CAGR for rental revenue from 2024-26. Our rental revenue CAGR comes in at the low end of this range. We think this is a reasonable estimate, given the current competitive dynamics and Herc’s exposure to cyclical end markets.

We agree new U.S. infrastructure spending presents an attractive opportunity for Herc. The company highlighted a few multiyear mega projects that it’s currently supplying. These projects have the potential to drive operating leverage, but we believe Herc will have to compete with the other top rentals companies—which possess stronger fleet capabilities—to win bids. In addition, we think Herc will likely have little room to raise rental prices on mega projects, given that many customers look to the rental channel to keep project costs as low as possible. As a result, we forecast adjusted EBITDA margins to come in over 45% on average versus Herc’s range of 46%-49% from 2024-26.