herc rentals (nyse:hri) stock pitch
TRANSCRIPT
§ Herc Rentals (HRI) is a diversified equipment rental company with a balanced business profile
§ Operates out of 280 company-owned branches around the world to provide customers with equipment, services and solutions necessary to achieve optimal performance
§ Serves a broad range of customer end user markets, including construction, industrial, government, infrastructure, remediation, emergency response, entertainment and events, facilities and maintenance
§ Separated from Hertz’s rental car business on June 30, 2016, enabling the firm to have financial and operational flexibility to pursue strategies specific to the equipment rental business
§ Own approximately $3.5Bn in fleet and have total revenues of approximately $1.6Bn, making it the third largest equipment-rental firm by revenue
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Business DescriptionNorth American Equipment Rental Market
Sources: Company Website, RBC Capital Markets, KeyBank Capital Markets
Company Overview
Management Team
• Experienced leadership team, with the CEO, COO, & CIO have more than 30 years of equipment industry experience
• The regional vice-presidents have an average of 24 years of industry experience
“The opportunity in Herc lies in the company's growth. Down the road as it improves its margins […] the stock will rise to $78 per share in the next three years.” – Mario Gabelli
§ Equipment rentals is a $45Bn business growing at 4% to 5%
§ Highly fragmented, with three major players benefitting from the increase in infrastructure spending
§ Decreasing production in the upstream oil and gas markets
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Investment Thesis I
Sources: Company Website, RBC Capital Markets, KeyBank Capital Markets, GAMCO Investors, Yahoo! Finance, Independent
Investment Thesis
Investment Thesis II
Investment Thesis III
§ Strong asset base, including a $3.5Bn fleet of machines, and 280 company-owned branches around with 270 in the United States and Canada
§ Expanding products and services, by adding smaller products such as floor scrubbers
§ Focused on expanding ProSolutions and ProContractor tools in North America
§ The United States currently has poor infrastructure, with 40% of bridges being rated as D- by the ASCE
§ American infrastructure spending projected to increase $1Tn
Growing Equipment Rental Business Projected Increase in Infrastructure Spending
Strong Asset Base and Broad Footprint in North America
§ Global infrastructure spending to reach $9Tn by 2025, with the United States projecting $1Tn in infrastructure spending by 2025
§ Currently a $45Bn business growing at 4-5%
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Catalysts
Sources: Company Website, BMI Research, Yahoo! Finance, PwC, Oxford Economics
Catalysts and Risks
Risks
§ Only 10 locations outside North America
§ Canada and the United States currently represent 82% of total revenue
§ Making strategic changes to reduce fleet and control costs in upstream oil & gas markets
§ Made strategic changes to deemphasize low margin new equipment sales
§ Implemented new rental training programs to support the ProSolutions and ProContractor gear
Increasing Global Infrastructure Spending
Strategic Changes to Equipment Lines
Highly Fragmented Industry
§ Highly fragmented industry, with top 3 major players benefitting the most
§ Strong asset base of machines that could handle an increased market demand
Non-Residential Construction
§ Non-residential construction slowed in 2016, but still remains positive
§ Significant portion of the fleet that is unavailable for rent
§ Due to oversupply of certain used equipment
Worldwide Markets
Fleet Availability
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Valuation Range
Sources: Company FilingsSee Appendix for Valuation Model Breakdowns
Valuation & Conclusion
Price Target Summary Justification
28.3
20.9
28.97
59.6
54.1
38.20
10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0
DCF Value at 4.0x-6.0x Exit EBITDA Range
DCF Value at 2.0%-4.0% Perpetuity Range
52 Week Market High/Low
DCF / LBO Football Field
Target Price: $52
Target Price $52.00
Current Market Price $39.86
Implied 1-Year Return 30.5%
§ The Discounted Cash Flow Value at 2.0% to 4.0% perpetuity range heavily discounts the growth of Herc due to new macro trends in fiscal spending
Market Cap $1.13Bn Enterprise Value $3,151Bn Price/Earnings 15.73x
Herc's experienced executive team, combined with new macro trends in fiscal spending on infrastructure, provides a very unique & attractive entry-point for investors.
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Public Company Comparables
Sources: Company Filings, Thomson One
Appendix I: Comparable Companies
Car Rental EV / EBITDA EV / Sales Price / Earnings
(US$ millions, except per share data) Enterprise Value Equity Value Price LTM FY1 FY2 LTM FY1 FY2 LTM FY1 FY2
Peer Group Name
Avis Budget $16,312.01 $3,331.01 $37.90 5.6 x 19.3 x 18.5 x 1.9 x 1.9 x 1.8 x 19.0 x 12.8 x 11.1 x
Hertz Global $16,143.05 $2,362.05 $28.47 4.4 x 23.1 x 18.3 x 1.7 x 1.8 x 1.8 x NEG 41.7 x 9.5 x
Sixt $4,688.35 $2,511.44 $58.99 6.0 x 5.8 x 5.3 x 1.8 x 1.7 x 1.6 x 21.8 x 19.1 x 16.7 x
Europcar Groupe $3,839.57 $1,351.76 $9.43 8.5 x 13.7 x 13.2 x 1.6 x 1.6 x 1.6 x 11.9 x 10.3 x 9.4 x
MEAN $10,245.75 $2,389.06 – 6.1 x 15.5 x 13.8 x 1.7 x 1.8 x 1.7 x 17.6 x 21.0 x 11.7 x
HERCHoldings $3,151 $1,077 $38.04 5.6x 5.9x 5.5x 2.0x 2.0x 1.9x 15.7x 496.2x 43.1x
Equipment RentalPublicComps EV/EBITDA EV/Sales Price/Earnings
(US$millions,except persharedata) EnterpriseValue EquityValue Price LTM FY1 FY2 LTM FY1 FY2 LTM FY1 FY2
PeerGroupName
United Rentals Inc $15,114.09 $7,681.27 $89.50 5.6 x 5.7 x 5.6 x 2.6 x 2.7 x 2.7 x 13.7 x 10.8 x 10.6 x
H&E Equipment Services $1,333.24 $613.02 $15.18 4.7 x 4.4 x 4.4 x 1.4 x 1.4 x 1.4 x 13.5 x 15.7 x 15.4 x
Ritchie Bros. Auctioneers Incorporated $3,917.27 $4,086.18 38.30 20.3 x 18.7 x 16.8 x 7.0 x 7.0 x 6.6 x 37.6 x 32.5 x 29.1 x
Allison Transmission Holdings, INC. $7,142.52 $5,138.52 31.07 12.9 x 11.5 x 11.4 x 3.7 x 4.0 x 3.9 x 31.5 x 26.8 x 22.7 x
Navistar International Corporation $6,458.29 $2,195.29 26.89 14.8 x 11.7 x 10.9 x 0.8 x 0.8 x 0.8 x NEG NEG 44.0 x
MEAN $6,793.08 $3,942.86 – 11.7 x 10.4 x 9.8 x 3.1 x 3.2 x 3.1 x 24.0 x 21.4 x 24.3 x
HERCHoldings $3,151 $1,077 $38.04 5.6x 5.9x 5.5x 2.0x 2.0x 1.9x 15.7x 496.2x 43.1x
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Projected Cash Flow and Share Price
Sources: Company Filings, Thomson One
Appendix II: Discounted Cash Flow Analysis
FreecashflowbuildupFiscalyear 2015A 2016E 2017E 2018E 2019E 2020E CAGR2017-2021 Assumptions
Revenue 1500.0 1575.0 1693.1 1828.6 1965.7 2083.7 5.8%RentalTruckIndustrytogrowat6.8%CAGRtillendof2020
AnnualGrowth - 5.0% 7.5% 8.0% 7.5% 6.0%
EBITDA 579.0 625.0 745.0 822.9 884.6 833.5 5.9%Estimate45%EBITDAmargin,competitoraveragehistorical
EBIT 127.8 245.0 368.8 450.4 508.4 449.8LessTaxes 35.0% (45.6) (85.8) (129.1) (157.6) (177.9) (157.4) CurrentlyhashighDeferredTaxesEBIAT(NOPAT) 82.2 159.3 239.7 292.8 330.5 292.4
Plus:Depreciationandamortization 383.3 380.0 376.2 372.4 376.2 383.7Plus:DeferredTaxes 22.3 36.7 36.7 36.7 36.7 36.7 NetlosscarryforwardsstraightlinePlus:StockBasedCompensation 3.0 3.0 3.0 3.0 3.0 3.0Less: Increaseinnetworkingcapital $(29.3) $(30.0) $(35.0) $(35.0) $(30.0) $(25.0)UnleveredCFO 461.5 549.0 620.6 670.0 716.4 690.8Less: Capitalexpenditures $(537.0) $(513.0) $(518.1) $(523.3) $(518.1) $(507.7) -0.2% Capex HistoricallyConsistentLess: Purchasesof intangibleassets - - - - - -
UnleveredFCF -75.5 36.0 102.5 146.6 198.3 183.1 38.4%PVofFCFs 531.62
ExitEBITDAmultipleapproachTerminalyearEBITDA 833TerminalvalueEBITDAmultiple 6.0xTerminalvalue 5,001Presentvalueof terminalvalue 4,150.0Presentvalueof stage1cashflows 531.6Enterprisevalue 4,681.6ImpliedTVperpetualgrowth rate 4.1%FairvaluepershareEnterprise value 4,682Less:Netdebt (2,058)Equityvalue 2,623.6Dilutedshares 44.500Equityvaluepershare $58.96
PerpetuityapproachNormalizedFCFt+1 183.07Long termgrowthrate(g) 3.0%Terminalvalue 3,974.2Presentvalueof terminalvalue 2,841.0Presentvalueof stage1cashflows 531.6Enterprisevalue 3,372.7ImpliedTVexitEBITDAmultiple 4.8x
FairvaluepershareEnterprise value 3,373Less:Netdebt (2,058)Equityvalue 1,315Dilutedshares 44.500Equityvaluepershare $29.54
WACC:LongTermGrowthRate(g):$29.54 2.0% 2.5% 3.0% 3.5% 4.0%10.5% (3.66) (1.53) 0.89 3.65 6.849.5% 2.33 5.18 8.47 12.31 16.858.5% 10.17 14.14 18.82 24.44 31.327.5% 20.88 26.69 33.78 42.66 54.066.5% 36.36 45.52 57.31 73.02 95.025.5% 60.70 76.94 99.68 133.79 190.63
WACC:ExitEBITDAMultiple$58.96 4.0x 4.5x 5.0x 5.5x 6.0x10.5% 23.21 30.50 37.80 45.10 52.399.5% 24.85 32.31 39.78 47.24 54.718.5% 26.55 34.19 41.82 49.46 57.107.5% 28.31 36.12 43.94 51.75 59.576.5% 30.13 38.13 46.13 54.13 62.135.5% 32.01 40.20 48.39 56.58 64.77