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Herc Faces Setback due to Hollywood Strike
Impact of the Strike
Bank of America analyst Sherif El-Sabbahy has downgraded shares of rental equipment company Herc to underperform from buy, citing the ongoing writers and actors strike in Hollywood. El-Sabbahy states that while the impact from the entertainment industry will be relatively minor (~3-5% of sales), it adds to the challenges that Herc is currently facing. He believes that the strike is a notable headwind in an otherwise positive earnings season.
Positive Outlook on Core Markets
El-Sabbahy remains constructive on the core markets for Herc and the rental equipment industry. He highlights that infrastructure, electric vehicle investments, and semiconductor manufacturing will provide multiyear tailwinds. While entertainment is a smaller portion of Herc's portfolio, it is high margin and involves less fungible equipment compared to the construction business, which makes it more susceptible to drops in activity.
Impact on Financials
In the first quarter, Herc's results were impacted by a moderation in film and studio production levels, and El-Sabbahy expects the impact in the second quarter to be even higher due to the work stoppages caused by the strike. He notes that operating leverage has been a weak point for the company in recent quarters.
Shares of Herc fell 1.6% during premarket trading following the downgrade. However, the stock has seen an overall increase of 8.1% in 2023 and has rallied more than 38% in the past 12 months.
By addressing the impact of the Hollywood strike and providing insight into the company's core markets and financials, El-Sabbahy's analysis offers valuable information for investors evaluating Herc.
Conclusion: Potential Impact of Hollywood Strike on New Business
The ongoing Hollywood writers and actors strike has presented a notable setback for rental equipment company Herc, as highlighted by Bank of America analyst Sherif El-Sabbahy. While Herc's exposure to the entertainment industry is relatively minor, accounting for approximately 3-5% of sales, the strike adds to the existing challenges faced by the company. This development is crucial to consider, particularly for new businesses entering the rental equipment space, as it underscores the importance of diversifying revenue streams and anticipating potential disruptions in specific market segments.
Despite this setback, El-Sabbahy maintains a positive outlook on Herc's core markets, which include infrastructure, electric vehicle investments, and semiconductor manufacturing. These sectors are expected to provide multiyear tailwinds for the rental equipment industry. For new businesses in this space, focusing on these growth areas can offer opportunities for sustained profitability, even in the presence of industry-specific setbacks.
It is crucial for new businesses to be mindful of potential impact on financials, such as the moderation in film and studio production levels that affected Herc's first quarter results. By carefully managing operating leverage and diversifying customer base, new businesses can mitigate the potential negative effects of similar disruptions. This lesson is particularly relevant in sectors where certain product lines are more susceptible to drops in activity, as seen in Herc's higher-margin, non-fungible entertainment segment.
While Herc experienced a decrease in its stock value following the downgrade, it is essential for new businesses to recognize the overall growth potential in the rental equipment industry. Despite recent challenges, Herc's stock has seen significant increases in the past year, indicating the potentially lucrative nature of the market. By thoroughly analyzing and understanding market dynamics, new businesses can identify opportunities for success and establish strategies that minimize the impact of industry-specific hurdles.
In summary, the Hollywood strike serves as a reminder for new businesses in the rental equipment industry to diversify revenue streams, focus on growth sectors, and anticipate potential disruptions. By adopting a well-rounded approach and adapting to changing market conditions, new businesses can position themselves for long-term success in the industry.
Article First Published at: https://www.cnbc.com/2023/07/21/bank-of-america-says-the-hollywood-strikes-can-hurt-this-little-known-equipment-rental-stock.html