Herc Holdings: A Hidden Gem in the Equipment Rental Sector?

The equipment rental industry, a quiet yet critical driver of economic activity, has long been overshadowed by sectors like tech or healthcare. But within this niche, Herc Holdings Inc. (NYSE:HRI) stands out. Despite appearing overvalued on some metrics, the company's robust fundamentals and strategic positioning suggest it may still be undervalued relative to its growth potential. Let's unpack the numbers.

Valuation Metrics: A Mixed Picture

HRI's valuation metrics present a paradox. Its P/E ratio of 25.49 as of June 2025 is 57% above its historical average and 39% higher than United Rentals Inc. (URI), its closest peer. This could suggest overvaluation. Yet its EV/EBITDA ratio of 4.65 is starkly lower than URI's 8.39 and far below the industry median of 8.835. This divergence highlights a key point: HRI's earnings growth is outpacing its valuation on a cash flow basis.

The fair value estimate of $267.54—55% above its June 2025 price of $117.09—underscores this disconnect. While P/E ratios often reflect short-term sentiment, EV/EBITDA captures the company's operational efficiency and scalability. HRI's ability to generate strong cash flows from its $6.4 billion asset base (reflected in its P/B ratio of 3.03) suggests the market may be undervaluing its long-term potential.

Growth Drivers: Why HRI Could Justify Its Valuation

1. Structural Demand in Infrastructure: Governments globally are prioritizing infrastructure spending, from U.S. road projects to European green energy initiatives. Equipment rentals are a cost-efficient way to meet surging demand without over-investing in fixed assets.
2. Digital Transformation: HRI's investment in IoT-enabled equipment and AI-driven pricing tools positions it to capitalize on efficiency gains. Its fleet utilization rate—already above industry norms—could rise further.
3. Market Share Gains: While URI dominates the U.S. market, HRI is expanding into high-growth regions like Canada and the Middle East. Its recent acquisition of smaller regional players has also boosted scale without overextending debt.

Risks and Caution Flags

• Economic Cycles: Equipment demand is cyclical. A recession could pressure margins and rental rates.
• Competition: URI's deeper pockets and broader customer base remain a threat.
• Valuation Misstep: If HRI's earnings growth slows, its elevated P/E could become unsustainable.

Investment Thesis: A Contrarian Play?

HRI's valuation metrics are a double-edged sword. While its P/E ratio may deter short-term traders, its EV/EBITDA and P/B ratios signal a valuation gap that long-term investors can exploit. The fair value estimate of $267.54—supported by strong cash flow generation and secular tailwinds—suggests significant upside.

Actionable Takeaway:
- Buy: Investors with a 3-5 year horizon should consider accumulating shares, especially if the stock dips below $100.
- Hold: For those focused on near-term gains, wait for clearer signs of margin stabilization or macroeconomic stability.
- Avoid: Short-term traders may want to sit out given the volatility in construction demand and valuation skepticism.

Conclusion

Herc Holdings is a classic case of a company trading at a premium on one metric but a discount on another. While its P/E ratio alarms the cautious, its EV/EBITDA and strategic positioning argue for growth that could justify—and exceed—current prices. In a sector where tangible assets and cash flow matter most, HRI's fundamentals are too strong to ignore.

The market may be conflicted, but the data suggests this hidden gem is worth a closer look.