Herc Holdings

Herc Holdings reported 20% revenue growth, though it was weighed down by 50 basis points of adjusted EBITDA margin compression to 40.4% amid results that are still distorted by its transaction with H&E Equipment Services.

Why it matters: On a pro forma basis, Herc delivered more impressive 2% equipment rental revenue growth and Rental EBITDA margin compression of 120 basis points, which was impacted by fuel costs. Margins would have expanded 50 basis points excluding this. We think Herc has moved past dyssynergy risks. One of our biggest concerns about Herc has been transaction integration risk. The company improved dollar utilization (a key efficiency metric) by 220 basis points, further implying better execution now that H&E is fully integrated after some bumpy results out of the gate. The company modestly increased its revenue guidance, citing robust mega project demand and stable local markets. While Herc’s revenue growth trailed peers, they still increased their capex guidance by almost 40%, which is still a strong signal of confidence in future demand.

Between the lines: While organic growth was not as strong as its listed equipment rental peers, we think there were enough signals in its results that the company is benefiting from similar industry tailwinds, and the company is likelier to close its performance gap.

The bottom line: We are increasing our fair value estimate for no-moat Herc Holdings to $161 per share from $159, reflecting modest changes to management’s guidance and the time value of money. Herc shares saw volatile trading in both positive and negative territory, likely a result of the fact that investors wanted to see revenue growth more in line with its peers.

Our $161 per-share fair value estimate equates to about 16 times our 2026 EPS estimate.

The company is seeing resilient demand across its portfolio, highlighting a stable outlook for local accounts versus more conviction at national accounts. This is a less favorable mix than United Rentals. We forecast 16% growth and rebounding margins in 2026 for the pro forma business amid economic uncertainty and an average 8% top line over the rest of our forecast horizon as the business “normalizes.” While H&E underperformed in 2025 due to deal-related uncertainty, we anticipate the acquired H&E business will perform similarly to Herc and converge toward Herc’s operating margins. This is broadly consistent with the firm’s 10-year CAGR and beyond. We don’t see anything in the competitive landscape or macroenvironment that would lead us to take a divergent view. Herc should continue to outgrow the equipment rental industry and be relatively in line with historical performance.

We take a conservative view on operating margins, holding them flat during the forecast period given that Herc discloses less than United Rentals around its general rental/specialty mix. Further, Herc over-indexes to local accounts, which skew general rental and presumably have less pricing power. This implies that Herc would have less gearing to an upside scenario compared with United Rentals. The overall tension of persistent price headwinds in general rental, offset by greater contribution from specialty, strikes us as a sensible base case.

Our Stage II forecast period incorporates an estimated investment rate of 25% and an earnings before interest and growth rate of 3%, with perpetual growth of 3%. An 8.4% weighted average cost of capital derives from a market-average cost of equity and the firm’s current capital structure.

We believe Herc Holdings has yet to establish an economic moat due to its smaller scale compared with its peers, and therefore hasn’t yet fully realized the scale benefits (and associated cost advantages) evident in the returns generated by its larger peers. We respect what Herc management has accomplished operationally since the spinoff from Hertz in 2016, largely following the strategy blueprint of United Rentals. Steps include integrating and aligning the branch networks, layering on specialty rental solutions, and implementing technology solutions to make it easier for customers to locate and price equipment. Per Herc management, one area in which the firm has really tried to close the performance gap with United Rentals is how it disposes of equipment when it's at the end of its useful life. Historically, Herc would mainly pursue auctions, whereas the wholesale and retail approaches of peers usually allow for meaningfully more value recovery. Overall, reviewing the strategic plans for both Herc and United Rentals would imply very similar strategies. However, some persistent differences bear mentioning. First, Herc remains one-third the size of United Rentals in terms of fleet size, which likely implies ongoing differences in pricing with equipment suppliers and less leverage with customers. Second, Herc has a lower penetration of higher-margin specialty rentals. Finally, Herc still skews more heavily toward local accounts versus national accounts. This means that more of its customers lack scale, are likely more economically sensitive, and are likely less diversified from a sector perspective. Until we see more shift in this mix, we struggle to see Herc closing its performance gap with its larger peers at the ROIC level. This isn’t to say it’s not achievable; however, we believe many investors underestimate the time it takes to execute these changes.

Notably, in 2025, Herc made an aggressive overbid for United Rentals' agreed-upon transaction to acquire H&E Equipment Services. We infer multiple signals from this dynamic. First, Herc acknowledged H&E was one of the few available targets of scale to “move the needle” and close its market share gap with United Rentals, let alone that it would be problematic to allow United Rentals to extend its market leadership if the original deal went through. Herc is leveraging up its balance sheet quite substantially to do so (nearly 4.0 times pro forma net debt/EBITDA) and will spend the next several years integrating and deleveraging. Second, H&E is almost entirely a general rental, or GenRen, business, meaning it will be more challenging to layer on specialty sales and will likely be somewhat dilutive from a returns perspective. Incidentally, Herc’s share price reaction to these developments indicates a very high degree of investor skepticism. Finally, while H&E was a public company, it was also a closely held family business, and the decision to sell to a competitor suggests that consolidating the space and winning against the competition is not as straightforward. In other words, there is likely a significant economic moat present in the equipment rental industry.

We think increasing rental penetration can be a key driver for the industry, and this will favor the market leaders. The equipment rental market in North America is approximately $50 billion, and we believe it’s poised to grow by at least midsingle digits over the next five years. Multiple factors drive this. First, overall investment in large projects such as infrastructure, semiconductor manufacturing, LNG, and other construction provides durable tailwinds. Specifically, these large, complex projects favor market leaders who can offer a greater breadth of products and solutions to customers. Additionally, we anticipate growing rental penetration and specialty equipment sales as customers increasingly outsource their needs. Currently, rental penetration rates in North America stand near 55%. We expect that this trend will continue for the foreseeable future, as more contractors opt to rent equipment instead of purchasing new equipment, as it reduces their project costs. By renting, customers can reduce their own equipment inventory, eliminate maintenance costs, and save on storage and warehousing expenses, thereby improving their own profitability.

Herc successfully integrates H&E, delivering significant synergies and achieving critical mass to support an economic moat.

The company can drive further penetration of specialty rentals, thereby enhancing pricing power and returns (a significantly longer runway here than its peers).

The company could replicate its success abroad.

The H&E deal may underperform and result in financial distress.

Herc has no pricing power, and therefore returns might stagnate or deteriorate.

Competitors could capture share via further consolidation and/or price competition.