Some of my thoughts-
In 2019, Herc was trading at more than a 60% discount to today's price. Revenues have only increased 45% in that four-year period. But diluted EPS clearly took off increasing over 600%!
Why? That's what I need to understand.
Next question is, was the stock cheap in 2019 or is it now expensive? Were the profits below expectations in 2019? It was trading at a PSR of about 0.7x and 2x cash flow - and ROE was sub10%. That's why it's so important we figure out exactly what changed.
As for cash flows, it depends what you think on the rental market. They're investing heavily - negative free cash flow of $50m in 2023 and negative $227m in 2022. It's a brilliant, bold move if management are correct about the overall market.
For reference, for every dollar of (rental) equipment depreciated, more than two dollars are being invested! This is almost straight out of the Stewart playbook when you also consider the fact that they've funded their capex through borrowings! (Maybe I'm just seeing EVA everywhere since it's my new obsession!)
If I were you (and I'm going to do this later), I'd just double-check everything and make sure you're seeing similar trends to management. I actually think Herc could be cheap when you consider their capex.
For 2024, they're forecasting net equipment capex spend of $500m to $700m so will come down from the big 2023 spend (this time last year they forecasted $1-1.2b in net capex and were about right*). Based on those numbers, increasing annual D&A figures and similar profits (given they've increased their adjusted EBITDA numbers by 7%), it's possible we could see a positive free cash flow figure this year. (Though, this is just a guess.)
(*Until now, I thought net capex meant capex less depreciation but in this case I think it means capex less asset sales because it wouldn't make sense otherwise. Feel free to double check; there's a chance I've misunderstood).
I'm liking what I'm seeing but I just need to get my head around the rental equipment market. Can this 15% operating margin be sustained for the foreseeable future? If my conclusion is yes, I'm a buyer. Will PM you when I've arrived at a conclusion.
Best,
Harsh |
