Calculating The Intrinsic Value Of Herc Holdings Inc. (NYSE:HRI)

Simply Wall St · 06/30 15:48

Key Insights

  • Herc Holdings' estimated fair value is US$114 based on 2 Stage Free Cash Flow to Equity
  • With US$132 share price, Herc Holdings appears to be trading close to its estimated fair value
  • Analyst price target for HRI is US$173, which is 53% above our fair value estimate

In this article we are going to estimate the intrinsic value of Herc Holdings Inc. (NYSE:HRI) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF ($, Millions) US$285.0m US$663.0m US$695.0m US$441.0m US$318.2m US$258.9m US$227.5m US$210.1m US$200.8m US$196.3m
Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Est @ -27.86% Est @ -18.62% Est @ -12.15% Est @ -7.62% Est @ -4.45% Est @ -2.24%
Present Value ($, Millions) Discounted @ 11% US$257 US$541 US$512 US$294 US$191 US$141 US$112 US$93.2 US$80.4 US$71.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.3b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$196m× (1 + 2.9%) ÷ (11%– 2.9%) = US$2.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.6b÷ ( 1 + 11%)10= US$942m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$3.2b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$132, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NYSE:HRI Discounted Cash Flow June 30th 2025

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Herc Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 11%, which is based on a levered beta of 1.792. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

See our latest analysis for Herc Holdings

SWOT Analysis for Herc Holdings

Strength
  • Debt is well covered by cash flow.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings declined over the past year.
  • Interest payments on debt are not well covered.
  • Dividend is low compared to the top 25% of dividend payers in the Trade Distributors market.
Opportunity
  • Annual earnings are forecast to grow faster than the American market.
  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
  • Revenue is forecast to grow slower than 20% per year.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Herc Holdings, we've put together three essential elements you should further examine:

  1. Risks: Take risks, for example - Herc Holdings has 3 warning signs (and 1 which is significant) we think you should know about.
  2. Future Earnings: How does HRI's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.