Hertz Corp. is a subsidiary of Hertz Global Holdings Inc. (HTZ). The company was founded 95 years ago and was sold by Ford Motor Company (F) in 2005. Today, car rental businesses are very competitive, and Hertz appears to be positioned well:
- 550,000+ vehicles
- 6,500+ locations
- 140+ countries
Last year Hertz bought Dollar Thrifty Automotive Group for $2.6B.
The acquisition will provide Hertz with a well-established and highly competitive position in the value segment of the US car rental market -- a segment in which Hertz's current position lags... Moody's
Call protected Hertz bonds currently boast an impressive 6.4% yield on the secondary market. These particular bonds are rated lower than other Hertz bonds; Moody's explains certain pre-LBO (leveraged buyout) unsecured Hertz debt is rated B3.
Check out how they compare to other auto rental, sales and service companies:
|Hertz Corp Sr Nt 7% 2028 (cusip: 428040BJ7) call protected||B3/-||105.25||6.44%|
|Autonation Inc Sr Nt 5.5% 2020, Cond Put Change Of Control, Cond Call, Make Whole Call (cusip: 05329WAK8)||Ba2/BB+||108.87||4.03%|
|Advance Auto Parts Inc Sr Nt 5.75% 2020, Cond Put Change Of Control, Make Whole Call (cusip: 00751YAA4)||Baa3/BBB-||111.52||3.90%|
|Avis Budget Car Rent LLC /Avis Sr Nt 9.75% 2020, Cond Put Change Of Control, Cont Call firstname.lastname@example.org, Cond Call, Make Whole Call (cusip: 053773AQ0)||B2/B||118.87||3.89% YTW 6.40%|
|Autozone Inc Sr Nt 2.875% 2023, Cond Put Change Of Control, Cont Call 10/15/22@Par, Make Whole Call (cusip: 053332AN2)||Baa2/BBB||96.83||3.24%|
Notice Hertz, Avis (CAR) and AutoNation (AN) are rated junk, while Advanced Auto Parts (AAP), and AutoZone (AZO) are rated investment grade. This shows the ranking; AutoZone has the best investment grade rating, Hertz has the worst junk rating in this selection. Highlighted are the bonds that will be used as the example:
|AutoZone (trading under par)||AutoNation|
|Advanced Auto Parts||Avis Budget Car|
The AutoNation bonds are rated 4 notches above the Hertz bonds, and two notches below Advanced Auto Parts 2020 bonds.
A Moody's review from January 1998 mentioned Hertz's former investment grade credit rating, just prior to these bonds being issued:
Hertz Corporation - A3 rated senior notes and medium term note program, Baa1 senior subordinated notes, Baa2 rated junior subordinated notes and P-1 rated commercial paper. Moody's
In 2005, Ford made a tender offer for several outstanding Hertz bonds, both companies were being reviewed for downgrade at the time. Hertz Corp. issued $250M of the 7% 2028 bonds in 1998, today only $27.5M remain outstanding.
Auto Rental Compared to Auto Service
I hope you've taken a moment to thoroughly review the list of bonds in the introduction. Take notice, the top investment grade bond is Advanced Auto Parts' 2020 bond; currently priced up to $111.52.
Here I've separated the companies with investment grade ratings from the companies with junk ratings:
AutoZone pulls in less net income quarterly than Hertz and Avis, though it maintains an investment grade rating:
Avis currently brings in the most net income, of the companies with junk rated bonds. Hertz and Avis have trended up significantly as the economy has bounced back. Now, take a look at the companies' EBITDA:
AutoZone is pulling in far more earnings before interest, taxes, depreciation and amortization. This may make a compelling case for the AutoZone bonds. The kicker is Hertz is pulling in over $1B more than AutoZone:
Now let's cross reference cash, debt, revenue and market cap:
|cash equivalents||debt||revenue / market cap.|
|Hertz||$494M||$12.7B||$8.7B / $7.6B|
|Avis||$554M||$10.8B||$7.2B / $2.3B|
|AutoZone||$118M||$3.8B||$8.6B / $13.2B|
|Advanced Auto Parts||$479M||$600M||$6.2B / $5.5B|
|AutoNation||$98M||$4.0B||$15.1B / $5.4B|
- Avis has the most cash equivalents.
- Hertz has the most debt.
- AutoNation does the most revenue.
- AutoZone has the largest market cap.
Check out their long-term debt comparison (the table above may include some short-term debt):
Comparatively, Hertz is buried in debt; though EBITDA is substantial. Advanced Auto Parts is compelling, because it has the least debt; over $800M EBITDA and is investment grade.
The Altman Z-score is a formula that measures risk of bankruptcy. Hertz and Avis are in the distress zone (Z<1.81), AutoZone is just shy of the safe zone. Advanced Auto Parts and AutoNation are in the safe zone (Z>2.99).
According to the Z-score AutoNation is less likely to go bankrupt, based on current financials.
The Beneish M-Score measures risk of earnings manipulation. A score below -2.22 correlates to a lesser chance that earnings are being manipulated. All of the automotive rental, dealer and service companies covered here currently score below -2.22.
Balancing Yield & Quality
Here is an example, that includes an income fund (such as (HYB) or (HYV)) in addition to Hertz 2028 bonds, Advanced Auto Parts 2020 and AutoZone 2023. This selection of bonds favors two investment grade positions to counterpoint the riskier Hertz junk bonds:
|portfolio size||7% Hertz 2028||5.75% Advanced Auto Parts 2020||2.87% Autozone 2023||Income Fund||total / %|
|$100,000||$3,225*||$0||$990||$350||$4,565 / 4.5%|
|$250,000||$3,225||$1,175||$1,980||$450||$6,830 / 2.7%|
|$1,000,000||$4,300||$2,350||$2,970||$550||$10,170 / 1%|
|$2,500,000||$6,450||$3,525||$4,950||$750||$15,675 / 0.62%|
*The dollar figures provide leeway for commissions and accrued interest.
The smaller $100,000 could really go with two or three Hertz bonds, depending on the investor's inclination. The Hertz bonds are rated B3, and are trading over par. However, in today's ultra low interest rate environment, the nearly 6.5% yield is tempting.
Three Hertz bonds should yield $210 a year. The company is in the distress zone and is rated junk, however, some larger investors are searching for yield right now. Hertz might be appealing because it is a recognized brand; it is immersed in debt, but not drowning, given substantial revenue and earnings.
If you have any thoughts on Hertz debt please leave a comment below.
Additional disclosure: I am long Ford bonds, I am considering the Hertz and Autozone bonds. This article is not a recommendation to buy or sell, please consult a financial adviser to determine proper allocations (if any) to fixed income.