Herc Holdings Is Taking Big Risks With Its Acquisition Strategy

Herc Holdings’ management team has improved the business since it was spun out of Hertz in 2016, a time when returns were quite poor (sub-3% returns on invested capital) and the business was not a priority for the parent. Key actions included consolidating its supplier base, improving the fleet composition to better align with customers, integrating locations, and disposing of equipment more cost-effectively. These moves are helping Herc realize economies of scale and scope, which are the building blocks of cost advantage. These are the fundamental traits that allow the company to outgrow its underlying market (average 4% compound annual growth rate). Since the spinout, revenue has increased at an 11% CAGR, EBITDA margin has increased by almost 1,000 basis points, and ROIC has increased by almost 800 basis points. Herc has achieved this through a blend of organic growth, greenfield site expansion, and acquisitions. Much like peers, Herc has added specialty rental capabilities (more-complicated bundled solutions that generally capture gross margins 800-1000 basis points higher than general equipment rental) and pursued more national accounts (customers spending more than $500,000 a year).