Since its inception in mid April, we added 9, stocks to the `Retire Young` portfolio and now it's time to introduce the second to last company in our portfolio. This company has been performing greatly in the last few months, yet it's been under the radar of many investors. At Seeking Alpha, the company is in the watch-list of only 1,116 people even though it returned 93% in the last year. Yes, I am talking about Hertz Global Holdings (NYSE:HTZ).
Introducing Hertz Global Holdings
Everybody has heard about Hertz at least once and everybody knows what the company does; yet, not many people considered it as an investment. We are talking about a company that's been growing consistently and that is expected to keep growing at a decent rate for the foreseeable future.
After reporting a loss of 5 cents per share in 2009, Hertz started to take off. In 2010, the company reported an income of 28 cents per share followed by 51 cents per share in the next year and 81 cents per share in 2012 (diluted normalized EPS). The earnings growth is also coupled with revenue growth. Since 2009, Hertz grew its revenue from $7.10 billion to $9.02 billion, a growth rate of 27%. Moreover, in the last 10 years, Hertz grew its revenues every year except for years 2008 and 2009, which coincide with the great recession.
As more people are able to afford traveling globally, companies like Hertz will be performing better. Compared to 2006, the number of people who could afford to travel outside of their country increased by 25% globally to 1 billion people. This resulted in revenue increases of 45% in the U.S., 31% in the European Union and 41% in Australia and New Zealand for Hertz. As the volume of air travel increases, this benefits Hertz greatly. For example, in 2010, the number of visitors to the U.S. by air increased by 8.8% compared to 2009; whereas, the company's transactions increased by 12.0%. The following year, the volume of visitors increased by another 4.1%; whereas, Hertz was able to increase its transactions by 7.5%. In 2012, the visitor volume increased by 3.4%, and Hertz increased its transactions by another 7.8%.
In 2012, Hertz served customers in 8,100 locations and generated $1 million per location in revenues, on average. In the last 4 years, the company spent $3.8 billion on acquisitions and these acquisitions will continue to fuel further growth and profitability for Hertz.
This year, analysts expect Hertz to earn $1.9 per share followed by $2.45 in 2014 and $2.72 in 2015. These predictions are in line with the company's future guidance. Effectively, we are looking at a forward P/E ratio of 13.37 for this year, 10.37 for 2014, and 9.35 in 2015. Even though the company currently enjoys a trailing P/E of 40, the future numbers look very promising for Hertz.
There is one thing that bothers a lot of investors about Hertz. The company's current debt totals $15.44 billion, which passes its market value of $10 billion. This doesn't worry me too much though. First, the great majority of this debt is long-term debt. Second, last year Hertz was able to refinance half of this outstanding debt by taking advantage of low interest rates. Third, the company has $18 billion in assets. Fourth, Hertz is expected to generate enough cash flow to service the debt easily in the coming years. Unless the company takes on more debt to make new acquisitions, it should have no trouble paying off its debt at the current income level. With the acquisition of Dollar and Thrifty, Hertz added 1,410 locations in 83 countries around the world to its portfolio. After all, not all debt is bad. Debt can be good if it is invested in growth fueling activities.
Hertz has a well balanced portfolio. The company generates 84% of its revenues from car rentals and 16% from equipment rentals. It generates 65% of revenues from the U.S. and 35% outside of the U.S. Franchisees generate 40% of the revenues for the company.
In the last quarter, Hertz reported a year-to-year revenue increase of 24% which was helped by Dollar Thrifty acquisition. Airport car rentals were up 14% and equipment rentals were up by 20%.
Since 2006, the company has been effectively and consistently cutting costs and improving employee productivity. Since 2006, Hertz has been able to cut $2.63 billion from its annual costs cumulatively whereas the goal is to reach $2.94 billion by the end of this year. Furthermore, the company's productivity per employee has increased from $174 to $238 between 2006 and the first quarter of 2013, which is very impressive.
In conclusion, Hertz is doing everything correctly in order to grow and add value to its investors. We are adding 400 shares of Hertz at $25.30 to our `Retire Young` portfolio. Furthermore, we are selling 4 covered call contracts expiring in September with a strike price of $27.00, which gives us a premium of $140 per contract. This effectively reduces our breakeven price to $23.90.