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Equipment rental company Herc Holdings (NYSE:HRI) announced better-than-expected revenue in Q3 CY2024, with sales up 6.3% year on year to $965 million. Its non-GAAP profit of $4.35 per share was 2.8% below analysts’ consensus estimates.
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Herc (HRI) Q3 CY2024 Highlights:
- Revenue: $965 million vs analyst estimates of $931.3 million (3.6% beat)
- Adjusted EPS: $4.35 vs analyst expectations of $4.48 (2.8% miss)
- EBITDA: $446 million vs analyst estimates of $438.5 million (1.7% beat)
- EBITDA guidance for the full year is $1.58 billion at the midpoint, above analyst estimates of $1.55 billion
- Gross Margin (GAAP): 39.9%, up from 38.2% in the same quarter last year
- Free Cash Flow was $122 million, up from -$54 million in the same quarter last year
- Market Capitalization: $4.80 billion
Company OverviewFormerly a subsidiary of Hertz (NASDAQ:HTZ) Corporation and with a logo that still bears some similarities to its former parent, Herc Holdings (NYSE:HRI) provides equipment rental and related services to a wide range of industries.
Specialty Equipment Distributors
Historically, specialty equipment distributors have boasted deep selection and expertise in sometimes narrow areas like single-use packaging or unique lighting equipment. Additionally, the industry has evolved to include more automated industrial equipment and machinery over the last decade, driving efficiencies and enabling valuable data collection. Specialty equipment distributors whose offerings keep up with these trends can take share in a still-fragmented market, but like the broader industrials sector, this space is at the whim of economic cycles that impact the capital spending and manufacturing propelling industry volumes.Sales Growth
Reviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Luckily, Herc’s sales grew at an impressive 11.5% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows Herc’s offerings resonate with customers.Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Herc’s annualized revenue growth of 16.7% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.
We can dig further into the company’s revenue dynamics by analyzing its most important segment, Equipment rentals. Over the last two years, Herc’s Equipment rentals revenue (aerial, earthmoving, material handling) averaged 14.6% year-on-year growth.
This quarter, Herc reported year-on-year revenue growth of 6.3%, and its $965 million of revenue exceeded Wall Street’s estimates by 3.6%.
Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates the market believes its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.
Operating Margin
Herc has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 18.6%. This result isn’t too surprising as its gross margin gives it a favorable starting point.Analyzing the trend in its profitability, Herc’s annual operating margin rose by 10.1 percentage points over the last five years, as its sales growth gave it immense operating leverage.
In Q3, Herc generated an operating profit margin of 27.2%, up 4.8 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.
Earnings Per Share
Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.Herc’s EPS grew at an astounding 33.4% compounded annual growth rate over the last five years, higher than its 11.5% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of Herc’s earnings can give us a better understanding of its performance. As we mentioned earlier, Herc’s operating margin expanded by 10.1 percentage points over the last five years. On top of that, its share count shrank by 2.1%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business. For Herc, its two-year annual EPS growth of 10.3% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.
In Q3, Herc reported EPS at $4.35, up from $4 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Herc’s full-year EPS of $12.55 to grow by 13%.