Herc Holdings: A Value Play

Summary

• Herc Holdings has done well to recover so far from the COVID-19 pandemic, with sales, profits, and cash flows rising.
• This follows years of strong performance leading up to the pandemic and further underscores the value of the enterprise.
• Shares are also attractively priced at this point in time, making them a compelling prospect for value-oriented investors.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

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Buying equipment, especially if that equipment is not something one will use regularly, can be an expensive proposition. Often, it can prove to be prohibitive when it comes to the activity that you are seeking to engage in. Because of that, a large and vibrant market has developed into what is known as the equipment rental space. And one of the leading players in this market, with a market capitalization of nearly $4.6 billion, is a company called Herc Holdings (NYSE:HRI). In recent years, revenue and cash flow at the business have grown at a nice clip. The 2020 fiscal year proved difficult because of the COVID-19 pandemic, but the company seems to be recovering nicely from that. Add in the fact that shares of the enterprise look to be rather cheap, especially if management's forecasts turn out to be accurate, and it could be an attractive opportunity for long-term investors.

A big player in the rental market

Herc Holdings has, over the years, turned itself into a significant player in the equipment rental space. Today, the company is one of the leading equipment rental suppliers in North America. As of the end of its 2020 fiscal year, the company had 277 locations on the continent. By the end of the latest quarter, the third quarter of its 2021 fiscal year, the company boasted 295 locations. These are spread across 39 states in the US, as well as in five provinces in Canada.

*Taken from Herc Holdings

The enterprise generates revenue by leasing out equipment such as aerial, earthmoving, and material handling equipment. It also leases out trucks and trailers, air compressors, and compaction and lighting equipment. According to management, about 23.6% of its equipment, as measured by initial cost, is associated with aerial activities. A further 17.3% comes from material handling equipment, with 13.5% coming from earthmoving activities.

Outside of these three big categories, the two largest sources of equipment cost for the company would be its trucks and trailers at 14.6% and what management calls ProSolutions. This latter offering is focused on providing specialized equipment and services, including the company's own technical expertise and customized solutions for specific customers. It is also important to note that the company generates 12.7% of its revenue by selling equipment, mostly used equipment, to customers who want it. And it generates 4.9% of its sales from delivering and picking up its equipment. So, as you can see, the company has a number of diverse revenue streams in this broader market.

In the years leading up to the COVID-19 pandemic, Herc Holdings managed to grow on a consistent basis when it came to its top line. Revenue expanded from $1.56 billion in 2016 to about $2 billion in 2019. That works out to an annualized growth rate of 8.7%. But then, in 2020, the COVID-19 pandemic hit, pushing sales down to $1.78 billion. Although this was painful, it was also short-lived. We can see this by looking at financial performance achieved so far through the firm's 2021 fiscal year. In the first nine months of that year, the company generated a revenue of just a little under $1.50 billion. This compares to the $1.26 billion achieved one year earlier.

*Created by Author

The bottom line for the enterprise has been much more volatile. This can be seen by looking at the chart above. Profitability has been all over the place, ranging from a net loss of $19.7 million in 2016 to a net profit of $160.3 million one year later. 2020's net income came in at $73.7 million, up from $47.5 million achieved in 2019. Fortunately, for investors, net profits in 2021 have been strong, with income during the first nine months totaling $152.3 million. That compares to the $38.2 million generated in the first nine months of 2020. Of course, there are other profitability metrics to consider. Operating cash flow, for instance, has also been volatile. But its general trajectory has been positive, climbing from $433.4 million in 2016 to $635.6 million in 2019. In 2020, this metric dropped only marginally, falling to $610.9 million for the year. A similar trend could be seen with EBITDA, with the figure climbing from $485.7 million in 2016 to $747.7 million in 2019. But then, in 2020, it dipped to $689 million.

*Created by Author

For the 2021 fiscal year, things were generally favorable. Net profits in the first nine months totaled $152.3 million. This compares to the $38.2 million achieved the same time one year earlier. Over this same timeframe, operating cash flow expanded from $424 million to $503.2 million. And EBITDA increased from $492.3 million to $639.3 million. Not only has management provided guidance on the bottom line for the 2021 fiscal year, but they have also provided guidance when it comes to 2022. Their current expectation is for the company to generate EBITDA for 2021 of between $870 million and $890 million, with that figure climbing in 2022 to between $1.05 billion and $1.15 billion. If we apply the same kind of growth rate to operating cash flow, then it should come in at about $748 million in 2021 and at $935 million in 2022. Applying the same kind of logic to profits should yield net income of $293.8 million in 2021 and $367.3 million in 2022.

*Created by Author

Using this data, we can now price the enterprise. Using the 2021 figures, the firm is trading at a price to earnings multiple of 15.5. Its price to operating cash flow multiple is 5.2, while its EV to EBITDA multiple is 7.3. If we use the 2022 figures instead, these multiples are 12.4, 4.9, and 5.9, respectively. To put this all into perspective, I decided to compare the company to the five highest-rated of its peers that I could find on Seeking Alpha’s Quant platform. On a price to earnings basis, these companies ranged from a low of 9.7 to a high of 25.3. Only one of these firms was cheaper than our target whether we use the 2021 or the 2022 data. I then did the same thing using the price to operating cash flow approach, ending up with a range of 3.2 to 59. In this case, for both years' worth of data, two of the five companies were cheaper than our target. And finally, I did the same thing using the EV to EBITDA approach, resulting in a range of 8 to 13.2. Our prospect was the cheapest of the group no matter which year we used for comparison.

Company	Price / Operating Cash Flow	EV / EBITDA
Herc Holdings	5.2	7.3
Univar Solutions (UNVR)	18.6	10.5
MSC Industrial Direct (MSM)	26.3	13.2
Air Lease Corporation (AL)	3.5	11.4
Triton International Limited (TRTN)	3.2	9.6
Beacon Roofing Supply (BECN)	59.0	10.1

Click to enlarge

Takeaway

At this moment, Herc Holdings appears to be doing quite well for itself. The company is growing at a nice clip and management seems to think that will continue, at least on the bottom line. Shares are priced at levels that look quite attractive today, leading me to believe that the company should make for a good opportunity for patient, value-oriented investors for the years to come.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[RoyGraham]

@ls2g09 I would love to see an update to this analysis. I like HRI especially after their retreat from $160 to $130 but would like insight into 2022 prospects.

[44island]

@RoyGraham Look for bumped up guidance when they release Q1.

[Tulip hoard]

Noting current pricing of vehicles recently going to take a pass but ty💩

[44island]

@Tulip hoard HRI has nothing to do with Hertz rental cars.

[CPA022784]

Same comment as on your URI article a month ago - the SA peers are useless. Try comparing URI and HRI to find value and determine which one is better.

[ls2g09]

@CPA022784 agree - Ashtead which is UK listed, (sunbelt rentals) is also a good comparator.

[CPA022784]

@ls2g09 Agree. I included them in my URI comment last month. They are a good peer also, although their geographic footprint and mix are a bit different. They trade OTC, but volume is light. Nevertheless, the 3 companies are really the only 3 public traded firms in the space. All the ones included in the table above are really silly.

[44island]

@CPA022784 HEES is also a comp, although smaller.