Herc (HRI)

Equipment rental company Herc Holdings (NYSE:HRI) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 35.1% year on year to $1.30 billion. On the other hand, the company’s full-year revenue guidance of $3.8 billion at the midpoint came in 14.2% below analysts’ estimates. Its non-GAAP profit of $2.22 per share was 4.1% below analysts’ consensus estimates.

Company Overview

Formerly a subsidiary of Hertz 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.

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.

Competitors in the equipment rental industry include United Rentals (NYSE: URI), Sunbelt Rentals (LSE:AHT), and H&E Equipment Services NASDAQ:HEES).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Herc grew its sales at an incredible 18% compounded annual growth rate. Its growth beat the average industrials company and shows its 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 12.8% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

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 11.9% year-on-year growth.

This quarter, Herc reported wonderful year-on-year revenue growth of 35.1%, and its $1.30 billion of revenue exceeded Wall Street’s estimates by 1.4%.

Looking ahead, sell-side analysts expect revenue to grow 19.8% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and suggests its newer products and services will fuel better top-line performance.

At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.

Herc’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 36.2% gross margin over the last five years. Said differently, roughly $36.22 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Herc’s gross profit margin was 34.1%, marking a 5.8 percentage point decrease from 39.9% in the same quarter last year. Herc’s full-year margin has also been trending down over the past 12 months, decreasing by 3 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

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’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 18.4% over the last five years. This profitability was elite for an industrials business thanks to its efficient cost structure and economies of scale. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Herc’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Herc generated an operating margin profit margin of 21.4%, down 2.3 percentage points year on year. Since Herc’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

We track the long-term change 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 is profitable.

Herc’s EPS grew at an astounding 24.7% compounded annual growth rate over the last five years, higher than its 18% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Herc, its two-year annual EPS declines of 15.2% mark a reversal from its (seemingly) healthy five-year trend. We hope Herc can return to earnings growth in the future.

In Q3, Herc reported adjusted EPS of $2.22, down from $4.35 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. Over the next 12 months, Wall Street expects Herc’s full-year EPS of $8.97 to shrink by 9.5%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Herc has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.2%, subpar for an industrials business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Herc to make large cash investments in working capital and capital expenditures.

Taking a step back, we can see that Herc’s margin dropped by 6.7 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Herc’s free cash flow clocked in at $142 million in Q3, equivalent to a 10.9% margin. This result was good as its margin was 3.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Herc’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 11%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Herc’s ROIC averaged 3 percentage point decreases over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Herc’s $9.78 billion of debt exceeds the $61 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $1.73 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Herc could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Herc can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

It was good to see Herc narrowly top analysts’ revenue expectations this quarter. We were also happy its EBITDA outperformed Wall Street’s estimates. On the other hand, its full-year revenue guidance missed and its EPS fell short of Wall Street’s estimates. Overall, this was a mixed quarter. The stock traded up 1.3% to $135 immediately after reporting.

Updated: December 3, 2025 at 9:08 PM EST

When considering an investment in Herc, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Herc isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years and is expected to accelerate over the next 12 months, its projected EPS for the next year is lacking. And while the company’s impressive operating margins show it has a highly efficient business model, the downside is its cash profitability fell over the last five years.

Herc’s P/E ratio based on the next 12 months is 17.3x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $167.20 on the company (compared to the current share price of $143.89).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.