Herc Holdings Analyst Hits Stock With Double-Downgrade As Hollywood Strike Continues

As the Hollywood writers’ and actors’ strike continues, a Bank of America analyst has turned bearish on a stock that provides rental equipment to studios in Hollywood for content creation, and filmmaking.

The HRI Analyst: Sherif El-Sabbahy double downgraded Herc Holdings Inc HRI from Buy to Underperform and lowered the price target from $150 to $140, saying that the ongoing strike isn't currently priced into consensus.

The HRI Takeaways: While El-Sabbahy remains broadly constructive on rental markets, he noted that the entertainment industry strike is a significant headwind.

Herc's exposure to entertainment, although relatively minor, accounting for around 3-5% of sales, is expected to negatively impact the company’s earnings in the near term, the analyst said.

However, the company's rental equipment industry — particularly its core business — is expected to perform well despite the Hollywood challenges, benefiting from multi-year tailwinds including Infrastructure, EV investments, and semiconductor manufacturing among others.

Read also: Global Film, TV Production Stalls As SAG-AFTRA Goes On Strike, Streaming Giants And Studios In Crosshairs

The analyst said Herc's entertainment segment is high margin, and its fleet is less interchangeable compared to construction equipment when activity drops, so a decrease in productivity is expected.

BofA also mentioned that Herc's entertainment segment revenues were down about 26% year over year in the first quarter; and the analyst expects a steeper decline of 60% in the second quarter, and a further drawdown of 75% in the third quarter.

Despite challenges in the entertainment sector, BofA remains positive about the demand in other areas of Herc’s business.

Stock Picks: That said, the analyst favors United Rentals, Inc URI as a better representation of the rental sector. Unlike Herc, United Rentals doesn’t have exposure to the entertainment industry and offers a higher free cash flow (FCF) yield of 7.5%, compared to Herc’s lower FCF yield.

HRI Price action: Shares of Herc Holdings are trading 5.65% lower to $134.34, according to Benzinga Pro.

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