Spotlight Stock 841

*Herc Holdings Inc. (HRI): Why Buy when you can Rent?

Herc Holdings is a rental equipment company, whose EPS barely flinched during 2020, its BI Rank is an impressive 10.7, and its 3-5 year annual growth rate is estimated at 31.5% (per 9 anlaysts)—not to mention that EPS growth this year is forecasted at 43% and next year at 28%. The potential market is $51 billion, of which Herc has 4%.

The company rents boom/crane equipment, forklifts, and other material handling equipment, scissor platforms, earth moving equipment, paving equipment, pumps, all manner of trucks and trailers, tools, generators … even equipment like grips and lighting for making movies, TV shows, commercials or even videos. One intriguing area that is getting a lot of play is the renting of its equipment for disaster recovery—be it a flood, hurricane, tornado, fire, earthquake, or whatever. Herc even got some business due to the big freeze in Texas back in February which will help Q1.

The company also does some business with the energy industry, such as oil and gas exploration/production (deemphasized), pipeline, refinery or clean energy building wind or solar farms.

Contractors are naturally the biggest source of revenues, including residential and non-residential, accounting for 33%. Industrial is next, at 30% of revenue. This includes equipment for refineries and petrochemical operations, automotive, aerospace, power, mining, agriculture, paper, food and beverage industries, etc. And of course, infrastructure. Government customers are another big source of revenue at 18%, with all other accounting for the remaining 19%. This is where the movies, entertainment and special events like golf tournaments fit in, to name just a few, about 5-6% of revenue.

Herc operates out of 277 locations in 39 states and 5 Canadian provinces, primarily in midsize and especially large urban markets where it can get more efficient utilization of equipment.

The equipment is typically new at the time of purchase and the average age of the equipment fleet is generally in the 40 to 50 month range, currently 46 months.

The  company plans to open 15-20 green field sites this year. In addition, in December Herc made its first acquisition, CSI, which added 4 locations in Texas.

Herc doesn’t give much guidance, but it does expect 2021 EBITDA to be in the range of $730 – $760 million.

While residential construction was a bright spot in 2020, commercial was slow, especially in Q2 and Q3. And yet, despite all this pandemic hurt, the company was able to earn adjusted EPS of $3.01, almost equal to the $3.15 reported pre-pandemic in 2019. Thanks to vaccinations, Herc is operating lean and mean and stepping on the gas.

For 2021, EPS estimates are $4.30 to $4.37 2021, about 43% growth. And analysts are expecting a further 33% gain in EPS, to $5.73 next year, and 31.5% annual growth over the next 3-5 years. This gives HRI a PEG of 0.7 (22.5 PE for 2021 / 31.5), a valuation very hard to come by in this market, as is 6.8 times free cash flow. The consensus for the seasonally slow Q1 is $.25, up from a pandemic impacted $.04. And note that the last 4 EPS surprises were 119%, 141%, 59% and 31.

And with just 4% of this $51 billion market, there is a lot of open road ahead, including M&A potential. There are lots of smaller rental companies out there. Meanwhile the BI Rank is 10.7 and Zacks gives the shares a 1 rank- Buy.

Herc’s earnings were a blowout (EPS of $1.10 vs. a consensus of $.25!). I speculated that full year EPS would have to be heading up from $4.30 to over $5 to maybe even $5.50.  Well, analysts surprised me with their bravery and the consensus is now $5.96!  Investors bid the shares to $110 … but they have illogically slipped back a bit. Go figure, though it’s actually nice when one of our stocks kneels down to let investors climb on. The valuation is only more compelling now—Buy.
Tom Bishop, BI Research, biresearch.com, April 21 & May 3, 2021

Herc Holdings Inc. (HRI)

52-Week Low/High: $23.06 – 114.74
Shares Outstanding:  29.61 million
Institutionally Owned: 96.84%
Market Capitalization: $3.152 billion
Website: ir.hercrentals.com

Why Herc Holdings:

  • Double-digit growth
  • Diverse customer base
  • Small market share boldes well for acquisitions, as does fragmented industry
  • Undervalued
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