Stock Story -
Equipment rental company Herc Holdings (NYSE:HRI) reported Q2 CY2024 results exceeding Wall Street analysts' expectations, with revenue up 5.7% year on year to $848 million. It made a non-GAAP profit of $2.60 per share, down from its profit of $2.69 per share in the same quarter last year.
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Herc (HRI) Q2 CY2024 Highlights:
- Revenue: $848 million vs analyst estimates of $835.6 million (1.5% beat)
- EPS (non-GAAP): $2.60 vs analyst expectations of $2.91 (10.7% miss)
- EBITDA Guidance for the full year is $1.58 billion at the midpoint, in line with analysts' expectations
- Gross Margin (GAAP): 36.1%, down from 36.9% in the same quarter last year
- Free Cash Flow was -$73 million, down from $92 million in the previous quarter
- Market Capitalization: $4.09 billion
Formerly 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 DistributorsHistorically, 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 GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Thankfully, Herc's 11% annualized revenue growth over the last five years was impressive. 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 20.5% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.
Herc also breaks out the revenue for its most important segment, Equipment rentals. Over the last two years, Herc's Equipment rentals revenue (aerial, earthmoving, material handling) averaged 17.5% year-on-year growth.
This quarter, Herc reported solid year-on-year revenue growth of 5.7%, and its $848 million of revenue outperformed Wall Street's estimates by 1.5%. Looking ahead, Wall Street expects sales to grow 1.6% over the next 12 months, a deceleration from this quarter.
Operating Margin Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
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 18.1%. This 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 9.1 percentage points over the last five years, showing its efficiency has significantly improved.
In Q2, Herc generated an operating profit margin of 21.9%, up 2.4 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with its general expenses like sales, marketing, and administrative overhead.
EPS We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Herc's EPS grew at an astounding 32.5% compounded annual growth rate over the last five years, higher than its 11% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into Herc's quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Herc's operating margin expanded by 9.1 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 also 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 14.8% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.
In Q2, Herc reported EPS at $2.60, down from $2.69 in the same quarter last 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 to grow its earnings. Analysts are projecting its EPS of $12.20 in the last year to climb by 12.2% to $13.68.
Key Takeaways from Herc's Q2 Results It was good to see Herc beat analysts' revenue expectations this quarter. On the other hand, its EPS missed. Overall, this was a mixed quarter for Herc. The stock remained flat at $145 immediately after reporting.
