A “Hollywood ending” for Herc has been postponed, according to Bank America. Analyst Sherif El-Sabbahy double-downgraded shares to underperform from buy, citing the near-term impact from the ongoing writers and actors strike in Hollywood. He also reduced his price target to $140 from $150, which implies a 1.6% pullback from Thursday’s close. Herc rents out equipment such as forklifts, generators and light towers companies across different industries, including entertainment. “To be clear, the impact from entertainment will be relatively minor (~3-5% of sales), however it muddies a story that has become more about execution. In an earnings season where we expect largely positive results across the space, it stands out as an idiosyncratic headwind,” El-Sabbahy wrote in a Friday note. El-Sabbahy remains constructive on the core markets for the company and the rental equipment industry, noting that multiyear tailwinds include infrastructure, electric vehicle investments and semiconductor manufacturing. While entertainment is a smaller portion of Herc’s portfolio, the segment is high margin and involves less fungible equipment compared to the construction business when activity drops, noted the analyst. “In the first quarter, Herc’s results were impacted by a moderation in overall film and studio production levels following the period of high content production coming out of the pandemic,” said El-Sabbahy. “The moderation in production levels impacted REBITDA margins by ~40bps in Q1. We expect the impact in Q2 will be notably higher, given work stoppages driven by the writers’ (and now actors) strike.” The analyst added that operating leverage has been a weak point for the company in the last few quarters. Shares fell 1.6% Friday during premarket trading. The stock is up 8.1% in 2023 as shares rallied more than 38% over the past 12 months. —CNBC’s Michael Bloom contributed to this report.
