What a time it’s been for Herc. In the past six months alone, the company’s stock price has increased by a massive 43.1%, reaching $134.76 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Herc, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Herc Not Exciting?
Despite the momentum, we’re sitting this one out for now. Here are three reasons you should be careful with HRI, plus one stock we’d rather own.
1. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Herc’s operating margin decreased by 7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 11.9%.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Herc’s EPS grew at a weak 2% compounded annual growth rate over the last five years, lower than its 20.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Unfortunately, Herc’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Herc’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 16.7× forward P/E (or $134.76 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Herc
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