HERC HOLDINGS INC (HRI) stock intrinsic value fair value estimate & owner earnings analysis

What the business is. Herc Holdings (Herc Rentals) is one of the largest equipment rental companies in North America. At the end of 2025 it had 602 locations. It rents aerial lifts, earthmoving machines, forklifts, trucks, compressors, power and lighting, and specialty gear through its ProSolutions and ProContractor lines. Customers are contractors, industrial plants and large infrastructure and construction projects. Of 2025 revenue of $4.38 billion, $3.77 billion was equipment rental and $509 million was sales of used rental equipment. The business model is simple: acquire machines, rent them out for several years, sell them used, and acquire replacements. The rental fleet, about $9.6 billion at original cost in June 2026 and 46 months old on average, is the business, and keeping it up costs money every year. The transformation. On June 2, 2025 Herc acquired H&E Equipment Services for about $4.8 billion, paid mostly in cash plus about 4.7 million new shares worth $584 million. H&E added about 160 branches. In July 2025 Herc sold its Cinelease film-studio rental business. The deal was paid for mostly with debt: total debt was $8.01 billion at June 30, 2026, and the diluted share count rose from 28.5 million to 33.5 million. Herc's history before 2025 describes a smaller, less indebted company, so we value the combined business. How we measured earnings. We start from operating cash flow. We strip out working-capital swings and deduct stock pay. We also deduct bad-debt provisions: the cash-flow statement adds these back, but they are revenue that will never be collected. Then we deduct the spending needed to keep the fleet intact, net of what the used equipment sells for. For a rental company this last step is the main judgement. We set fleet upkeep at about $1.1 billion a year, roughly the combined company's depreciation. Three facts support that level. In 2019, a year with almost no growth, Herc's net fleet spending ($463 million) exactly matched its depreciation. Over the twelve months to June 2026 the combined company spent $866 million net. Its 2026 plan implies about $1.0 billion including some growth for large projects. The amortization of acquired customer relationships and other intangibles, about $165 million a year, is added back as a non-cash charge. This is appropriate because the branch network behind those relationships is maintained by the fleet and facility spending we already deduct. On this basis, the twelve months to June 2026 produced about $255 million, or $7.60 per share: operating cash flow of $1,264 million, plus $169 million of working-capital build, minus $108 million of bad-debt provisions and $30 million of stock pay, plus $60 million of one-time deal costs, minus $1.1 billion of fleet upkeep. We rebuilt 2024 from the company's own pro forma figures for the two businesses combined. On the same basis it comes to roughly $12.50 to $13 per share, and 2025 comes to roughly $8 to $8.50 once deal costs are excluded. The combined business has so far lived through one good year for its local markets and one soft one. We take $10.00 per share, near the middle, as normal earning power. Recent trend. On a combined basis, 2025 rental revenue fell 6% as some local markets where H&E was concentrated slowed and H&E's salesforce was disrupted before the deal closed. The company says that disruption stabilized in the third quarter of 2025. Margins on used-equipment sales fell from 28% to 18%. The second quarter of 2026 was better. Rental revenue was $1.07 billion. Fleet productivity (rental revenue per dollar of fleet) rose to 39.3% from 38.3%, and net income was $19 million against a $35 million loss a year earlier. First-half operating cash flow was $591 million, against $412 million. On the simpler measure we track year by year, per-share owner earnings fell from $13.40 in 2024 to $8.73 in 2025, but that drop was driven by $199 million of one-time deal costs (about $6.34 per share) and by H&E being included for only seven months. Measured against the $7.60 earned over the latest twelve months, we let the first year improve only slightly, to $8.00. Leverage is the central risk. Interest expense ran about $500 million a year in 2026 ($126 million in the second quarter). Herc's bonds are $800 million at 6.625% due 2029, $1.65 billion at 7.00% due 2030, $600 million at 5.75% due 2031, $1.1 billion at 7.25% due 2033 and $600 million at 6.00% due 2034. The rest is a floating-rate bank credit line, a $750 million term loan and a receivables facility, whose lenders raised their commitments to $500 million in May 2026. No bond matures before 2029. The H&E purchase itself was expensive. It needs revenue gains or cost savings to earn more than the 7% the new notes cost. Herc reports removing H&E's corporate overhead but gives no dollar figure in its filings, so we credit savings only in the bull case. What growth we credit. Two things. First, fleet productivity has held at about 38-39%, so rental revenue has kept pace with what Herc pays for its fleet. On that record, earnings can rise roughly with equipment cost inflation, which we take as about 2% a year. Second, Herc has opened new branches at a steady pace: 21 in 2022, 23 in 2024 and 26 in 2025, the last during a soft year and while heavily indebted. We credit about 1% a year from this, less than the pace of openings, because new branches take years to mature and debt limits how much fleet Herc can add. We do not credit interest saved by paying down debt as growth. The cash used to repay debt is already counted as value to the owners, so counting the interest savings as well would count the same dollars twice. We also do not credit a broad construction recovery or share gains from large projects. Base case ($210 per share). Earnings are $8.00 next year and $9.00 the year after, and reach the $10.00 normal level in year 3. They then grow 3% a year through year 10 (about $12.30), 2% a year for the following ten years (about $15), and hold flat after that. What sustains the business long term is a network of about 600 locations and a rental operation that has run for more than 60 years. Bear case ($113 per share). A construction downturn hits while debt is still about four times cash operating profit. Herc's rental revenue fell 9% in 2020, and its filings describe the business as cyclical and tied to construction. Per-share earnings fall to $6 next year and $3 for the two years after, as used-equipment prices and fleet productivity drop against fixed interest costs. They recover to $6.50 by year 5 and then stay flat at $7.50 forever: debt repayment absorbs the cash, the H&E purchase never earns its cost, and refinancing the 2029 and 2030 bonds brings no relief. Even here Herc can protect cash by cutting fleet purchases, as it did in 2020, and no bonds mature before 2029, so we do not assume the debt swamps the business. Bull case ($336 per share). Local markets recover and H&E's overhead is removed. Earnings are $9.50 next year and $11.00 the year after, and reach $13.00 in year 3, close to the combined 2024 level. Growth then runs 6% a year through year 10 (about $19.50), in line with Herc's pre-deal record of pricing, new branches and small acquisitions. It then runs 3% a year for ten years and holds flat after that. Changes since our previous estimate. We previously put the base case at $270. We lowered it for three reasons. First, the earlier estimate treated interest saved from repaying debt as growth on top of counting that same cash as value to owners, and we removed the double count. Second, we credit branch openings more cautiously, because they are partly debt-funded and the company is now heavily leveraged. Third, our rebuild of combined 2024 earnings came in a little lower, so normal earning power moved from $10.50 to $10.00. On the positive side, we previously could not confirm the receivables facility's renewal. Its lenders have since raised their commitments, but the amendment we reviewed does not state the new maturity. What would make this wrong. First, if keeping the fleet up costs well above depreciation, for example because new equipment prices rise faster than rental rates, normal earnings would be below $10.00. Second, a long construction recession while debt stays near $8 billion. Third, if used-equipment sale values, which fund part of fleet replacement, keep falling. On the upside, if the second-quarter 2026 improvement in fleet productivity holds and H&E cost savings show up in cash flow, earnings would reach normal sooner than the base case assumes. Margin-of-safety price. This is a cyclical business with heavy debt and an unfinished integration, so the margin-of-safety price sits about 45% below the base case. That gives a margin-of-safety price of $115 per share, roughly equal to our bear case. From that price, a return to the base case within about three years implies roughly 20% a year; the price assumes a three-year holding period.