Herc Rentals Is Still Well Positioned to Benefit in the Near Term

Equity Analyst

Dawit Woldemariam

We believe Herc will continue to be a top-three player in the equipment rental industry. As one of the industry leaders, the company provides customers better equipment availability and reliability than smaller players. However, many of the equipment brands found in Herc’s product catalog can also be found at other competitors, such as United Rentals, Sunbelt Rentals (owned by Ashtead), and thousands of other rental companies across North America. 

For decades, Herc’s equipment rental business was under the Hertz Global umbrella. In 2016, the company was spun out as a stand-alone business. We think this was a prudent move and has given management room to invest in the business. By contrast, Herc previously suffered from underinvestment by the parent company. We expect Herc, like its peers, to employ an aggressive merger and acquisition strategy, given that the industry is ripe for consolidation. However, the company will likely be competing with other players looking to build scale. In terms of its branch network, Herc operates over 300 rental locations throughout North America. By comparison, United Rentals operates nearly 1,300 locations in the region, while Sunbelt Rentals runs over 900 branches. Herc is also increasingly moving into specialty equipment (24% of original equipment cost), which includes climate control, power and distribution, pump, and entertainment services. 

Finally, the company has exposure to end markets with near-term attractive tailwinds. We think construction and industrial markets will continue to improve from their pandemic lows. Nonresidential construction spending has been depressed, but we think this trend will reverse over the next few years as economic growth will spur new project development for industrial, retail, hotel, and office markets. We also believe the total addressable market for the equipment rental industry will continue to expand as rental penetration increases. More and more contractors are electing to rent general equipment (aerial lifts, forklifts, generators) that are intermittently used on projects. This allows them to save on project costs.

Business Strategy & Outlook

We don’t think Herc Holdings benefits from an economic moat, despite being one of the top three rental companies globally. In our view, the most likely moat source would be scale-driven cost advantages over smaller competitors. Larger players typically offer customers greater equipment availability and reliability than regional operators, but we don’t see any established barriers preventing other rental companies from following the same strategy as Herc. Over the past decade, larger players have acquired smaller rental companies, a playbook that others can easily replicate, eventually leading to similar levels of scale to the industry leaders. For these reasons, we believe it will be difficult for Herc to generate excess returns over the next decade. Furthermore, we think the price-sensitive profile of customers in the rental industry prevents the company from developing pricing power. 

Even if industry consolidation starts to take hold, we think the top 10 rental companies are in a strong position to increase their market share. The rental industry is highly fragmented, presenting numerous merger and acquisition opportunities for not only the top three players, but also the top 10 rental companies. Through an aggressive acquisition strategy, these players could eventually build scale similar to Herc's. While it’s natural to think that the top three rental companies: United Rentals, Sunbelt Rentals, and Herc will be the first in line to benefit from industry consolidation, we believe it's also reasonable to assume that significantly sized rental companies have a relatively strong chance at outbidding the top three players when smaller companies come up for sale. In some cases, M&A opportunities may not rise to the top three players’ attention, particularly in local markets where they don’t have a strong presence. 

Rental companies face numerous competitive forces, which we believe prevents the formation of cost advantage and intangible asset moat sources. Herc is just one of the hundreds if not thousands of other players in the rental industry that customers can choose to rent from. The industry ranges from small and local rental companies to national players like Sunbelt Rentals, which possesses approximately 13% market share in North America compared with United Rentals’ 17% share and Herc’s 4% share. In addition, customers can rent equipment from large retail stores such as Home Depot and Lowe’s and heavy equipment dealers. Together, we believe these competitive forces make it difficult for United Rentals and Herc to develop durable competitive advantages. From a cost advantage perspective, as illustrated earlier, both players will likely compete with the other rental companies on the M&A front, which may limit their ability to develop economies of scale. Additionally, we think both companies will need to improve their respective cost structures by reducing the costs associated with their branch networks and equipment sourcing strategies. With respect to intangible assets, we believe rental companies are closer to price takers than price makers. Customers choose to rent to keep project costs as low as possible, meaning rental companies have little room to raise rental prices and drive higher capital returns.

In our view, the rental companies have not built up enough of an economic cushion to weather future economic downturns. Moatworthy companies under our coverage in the heavy-equipment industry possess stronger returns on invested capital, which we forecast to be well over 20% on average compared with the low-double-digit range we forecast for Herc. While we are encouraged by the rental companies’ ability to pull back on capital expenditures during slower economic periods to preserve free cash flow, we acknowledge the cyclical nature of industrial and construction markets can lead to prolonged periods of muted sales growth and lower returns on invested capital. 

We do not think Herc faces any substantial threats from environmental, social, and governance risks. As a rental company, Herc does not have the same level of exposure to the product safety issues, carbon emissions and environmental regulation that original equipment manufacturers face. With respect to carbon emissions, rental companies’ equipment can be used multiple times by different customers, reducing the need for new equipment to be manufactured, eliminating emissions that would have been produced through manufacturing operations. We expect this to continue in the future as rental penetration proliferates in the medium term. Looking inward, rental companies are aiming to reduce their own carbon emissions, from the energy use in branch locations to their own transportation services (moving rental equipment between branches). Additionally, rental companies also have an opportunity to help their customers track the emissions of rental equipment to meet reporting requirements.

None

Economic Moat

Herc Hlds

Herc Holdings, Inc. engages in equipment rental services. It also sells used equipment and contractor supplies, and provides repair, maintenance, equipment management services, safety training, and ancillary services. Its equipment for rent includes aerial, earthmoving, material handling, trucks and trailers, air compressors, compaction and lighting. The company was founded in 1965 and is headquartered in Bonita Springs, FL.

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Herc Holdings, Inc. engages in equipment rental services. It also sells used equipment and contractor supplies, and provides repair, maintenance, equipment management services, safety training, and ancillary services. Its equipment for rent includes aerial, earthmoving, material handling, trucks and trailers, air compressors, compaction, and lighting. The company was founded in 1965 and is headquartered in Bonita Springs, FL.

BONITA SPRINGS, Fla.--(BUSINESS WIRE)--Herc Holdings, Inc. (NYSE: HRI), a leading North American equipment rental supplier operating through Herc Rentals Inc., has been included on USA TODAY's list of America's Climate Leaders 2023. This distinction is presented by USA TODAY and Statista Inc., a world-leading statistics portal and industry ranking provider, to U.S. companies that achieved comparably significant reductions in Scope 1 and 2 greenhouse gas emissions intensity, relative to revenue,.

Herc Rentals Recognized Among America's Climate Leaders 2023

BONITA SPRINGS, Fla.--(BUSINESS WIRE)--Herc Holdings Inc. (NYSE: HRI) (“Herc Holdings” or “the Company”), a leader in the equipment rental industry, today released its 2023 Corporate Citizenship Report, highlighting the company's progress on its Environmental, Social and Governance (ESG) strategy. The report demonstrates Herc Rentals' commitment to responsible ESG operating practices built upon a strong cultural foundation, a safety-first protocol, and a target-based approach to reducing the en.

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BONITA SPRINGS, Fla.--(BUSINESS WIRE)--Herc Holdings, Inc. (NYSE: HRI), one of North America's leading equipment rental suppliers, today announced that its Board of Directors has declared the Company's quarterly dividend of $0.6325 per share. The dividend is payable June 9, 2023, to shareholders of record as of May 26, 2023. About Herc Holdings Inc. Herc Holdings Inc., which operates through its Herc Rentals Inc. subsidiary, is one of the leading equipment rental suppliers with approximately 36.

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BONITA SPRINGS, Fla.--(BUSINESS WIRE)--Herc Holdings Inc. (NYSE: HRI) (“Herc Holdings” or “the Company”), a leader in the equipment rental industry, today announced that Larry Silber, president and chief executive officer, and Mark Humphrey, senior vice president and chief financial officer, will participate in a fireside chat and host private meetings during the Goldman Sachs Industrials and Materials Conference on Tuesday, May 9, 2023, in New York City. The fireside chat will be held at 10:15.

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BONITA SPRINGS, Fla.--(BUSINESS WIRE)--Herc Holdings Inc. (NYSE: HRI) ("Herc Holdings" or the "Company") today reported financial results for the quarter ended March 31, 2023. Equipment rental revenue was $654 million and total revenues were $740 million in the first quarter of 2023, compared to $527 million and $568 million, respectively, for the same period last year. In the first quarter of 2023, the Company reported net income of $67 million, or $2.

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BONITA SPRINGS, Fla.--(BUSINESS WIRE)--Herc Holdings Inc. (NYSE: HRI), a leading North American equipment rental supplier operating through Herc Rentals Inc., announced that, effective March 10, 2023, Senior Vice President and Chief Financial Officer Mark H. Irion will resign his position for another opportunity. He will remain with Herc Holdings through March 31, 2023, to ensure a smooth internal succession process. Irion joined Herc Holdings in June 2018.

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Herc Holdings Inc. (HRI) Q4 2022 Earnings Call Transcript

BONITA SPRINGS, Fla.--(BUSINESS WIRE)--Herc Holdings Inc. (NYSE: HRI) ("Herc Holdings" or the "Company") today reported financial results for the quarter and full year ended December 31, 2022. Equipment rental revenue was $713.1 million and total revenues were $786.0 million in the fourth quarter of 2022, compared to $542.4 million and $578.0 million, respectively, for the same period last year. In the fourth quarter of 2022, the Company reported net income of $97.8 million, or $3.

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