3 Reasons to Steer Clear of HRI and One Alternative Stock Worth Buying

Herc’s Recent Stock Performance: A Closer Look

Over the last half-year, Herc’s stock has outperformed the S&P 500 by 6.9%, climbing to $143.35 per share—a 13.4% increase. This strong showing may prompt investors to consider whether now is the right moment to invest or if caution is warranted.

Why We’re Hesitant About Herc

Despite recent gains, we remain cautious regarding Herc’s prospects. Here are three reasons for our reservations, along with an alternative stock we prefer.

1. Declining Operating Margins

Operating margin is a crucial indicator of a company’s profitability, reflecting earnings before taxes and interest. Over the past five years, Herc’s operating margin has dropped by 7.3 percentage points. This decline is concerning, especially since revenue growth should typically help improve margins by spreading fixed costs more efficiently. For the last twelve months, Herc’s operating margin stood at 10.8%.

2. Earnings Per Share Have Fallen

While long-term earnings trends are important, monitoring EPS over shorter periods can reveal emerging issues. In Herc’s case, EPS has dropped by an average of 22.1% annually over the past two years, even as revenue increased by 15.5%. This suggests that the company’s profitability per share has deteriorated despite top-line growth.

3. Substantial Debt Poses Risks

Although debt can help boost returns, excessive leverage increases financial risk. Herc currently carries $9.59 billion in debt, compared to just $52 million in cash. Its net-debt-to-EBITDA ratio is 5×, based on $1.82 billion in EBITDA over the past year, indicating a high level of leverage.

With such significant debt, borrowing costs rise, and credit ratings may be downgraded if profitability weakens. Should market conditions worsen, Herc could face financial strain—something prudent investors aim to avoid.

We hope to see Herc strengthen its balance sheet and improve profitability before considering it a strong investment candidate.

Our Verdict

While Herc’s shares have recently outpaced the market and trade at a forward P/E of 19.3× ($143.35 per share), we believe the company’s fundamentals do not meet our standards. There are more compelling opportunities elsewhere. For example, consider the world’s leading software company as a potential alternative.

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