Barclays Initiates HERC Rentals Equal-weight, Sees Value In Underperforming Assets

The equipment rental industry is below normal on pricing and volume, and is likely to outgrow its construction and industrial end markets, providing cash flow stability in a downturn, Barclays’ Robert Wertheimer said in a report. In the industry, HERC Rentals, a subsidiary of Herc Holdings Inc HRI has reasonable scale, albeit with underperforming assets.

Wertheimer initiated coverage of Herc Rentals with an Equal Weight rating and a price target of $34. He commented that the company’s “historical reliance on low pricing to win or retain large pools of revenue from national accounts is being adjusted by current management to drive profitable revenue rather than revenue alone.”

Management Initiatives Could Unlock Value

Under the prior management, the company was undermanaged, generating revenue even at the expense of profits. Pricing was “soft and undisciplined,” Wertheimer noted. Management has now commenced on a multiyear initiative to correct that.

The analyst expects Herc Rentals to focus more on delivering service and value to larger customers than on competing in terms of the lowest pricing. Thus, there seems to be room for the company’s pricing to increase without losing substantial business, provided it an improve account service.

While there is upside to earnings, Herc Rentals’ lower sales leverage, lower EBITDA margin, and higher leverage justifies its shares trading at a discount to peer United Rentals, Inc. URI.

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