Market Overview

Goldman Sachs: Herc Holdings Challenged By High Reinvestment Needs, Limited Cyclical Upside

Goldman Sachs: Herc Holdings Challenged By High Reinvestment Needs, Limited Cyclical Upside

Herc Holdings Inc (NYSE: HRI) has limited upside potential, according to Goldman Sachs, which turned bearish on the equipment rental company this week.  

The Analyst

Analyst Jerry Revich downgraded shares of Herc from Neutral to Sell and nudged up the 12-month price target from $65 to $66.

The Thesis

The U.S. construction rental market is in its eighth year of recovery, while commodity-levered end markets are entering only the fifth quarter of an organic growth upcycle, Revich said in a Thursday note.

The analyst forecast limited cyclical upside for construction rental stocks relative to commodity-reinvestment machinery end markets.

High reinvestment needs are driving a challenging cash flow outlook for Herc, Revich said. 

Herc plans to maintain net capex at 86 percent of EBITDA in 2018, based on the midpoint of guidance, the analyst said.

This, coupled with the company's interest expenses, suggests Herc is likely to have negative free cash flow through 2020, according to Goldman Sachs. 

Industry bellwether United Rentals, Inc. (NYSE: URI) is projected to grow its fleet organically while also generating an 8-percent free cash flow yield, Revich said. 

The analyst is positive on Herc's turnaround efforts, but said a better utilization rate has come at the expense of higher operating expenditures. 

"And with industry logistics costs accelerating, we see risk to incremental margin expectations in 2018E," the analyst said. 

Goldman Sachs said Herc shares present 3-percent upside potential to its 12-month price target, relative to the 23 percent average upside for its machinery coverage.

The Price Action

Herc shares have gained about 1.9 percent year-to-date. The stock was sliding 6.55 percent to $59.61 at the time of publication Friday. 

Related Links:

Morgan Stanley Overweight On WABCO, Deere, Caterpillar, United Rentals Among Machinery Stocks

Deutsche Bank Revisits Machinery Group After Tariffs, Macro Shifts

Latest Ratings for HRI

Mar 2020Goldman SachsMaintainsBuy
Sep 2019Bank of AmericaDowngradesBuyNeutral
Sep 2019Goldman SachsUpgradesNeutralBuy

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