TRG | The Bottom Line – 11/3

In the thick of Q3 earnings season, Herc Rental (HRI) held an investor day this week in which the company laid out 2026 targets. The company expects 10-14% rental revenue CAGR organically, EBITDA CAGR of 11-16% (reaching margin of 46-49%), REBITDA margin of 48-51%, and net capex of $2.8-3.7B. This implies share gain of 100-200 bps from the current level of ~4%. Herc expects market growth of 4%,so the company believes they can outpace this meaningfully. Management believes they can continue to do $500MM of bolt-ons per year in the next few years at similar multiples to the past few years (5.5x). What about FCF in a cyclical slowdown? In a realistic pessimistic scenario of 2024-25 each having 7% declines, with 2026 showing some growth, Herc believes EBITDA margin could still be ~46% and generate FCF of $1.4-1.8B, which is half of today’s market cap. Herc expects lower FCF in a growth market as they invest in capex to grow the fleet to take advantage, while in a market decline scenario, HRI (as well as other rental providers) would generate higher FCF for reduced capex and fleet disposals. TRG continues to believe that HRI’s valuation of ~4x EV on FY’23 EBITDA, which is far below the non-synergized multiple (~5.5x) that Herc is acquiring much smaller rental companies for, is way too low. We believe there aren’t many companies with double-digit organic growth rates, expanding margins, and low leverage, which sell at this multiple. We believe the cycle is also supportive of Herc’s goals, as channel checks and relevant public companies also point.