Hertz: Recent 20% Sell-Off Warranted After Runaway Momentum Last Year

Oct. 1.13 | About: Hertz Global (HTZ)

Shares of Hertz Global Holdings (NYSE:HTZ) have seen a fierce correction in recent times on the back of the CFO resignation and lower outlook for the current year.

After shares have doubled over the past year, momentum might have pushed up the stock a bit too much compared to improvements in the fundamentals.

Yet after a recent 20% sell-off, shares are by no means cheap as the company is a rather cyclical business. The relative high leverage leaves the company vulnerable to an economic slowdown as history has shown before.

Revised Guidance

Last Thursday, before the market open, Hertz revised its full year guidance for 2013.

Full year revenues are now seen between $10.8 and $10.9 billion, implying that the guidance has been downward revised by $50 million compared to February of this year.

Interestingly enough adjusted net income is seen down some $50 million as well, expected to come in between $780 and $830 million. Actually the $50 million worth of the guidance increased by $5 million compared to February. At this point in the year, Hertz should have much greater visibility for full year earnings.

Full year EBITDA is now seen between $2.12 and $2.19 billion.

Besides lower rental revenues, the weaker demand resulted in lower utilization and lower used car prices, only partially offset by stronger pricing.

I find these comments weird, as Hertz admits rental revenues are down driven by poor volume developments while pricing is strong. Perhaps it could lower pricing to induce more demand.

Despite the issues, Hertz is on track to report record earnings for this year.


Hertz has ended its second quarter for 2013 with $483 million in cash and equivalents. The company operates with $7.05 billion in corporate debt as well as $9.91 billion in vehicle fleet debt for a net debt position of around $17.0 billion.

Total revenues for the first six months of the year came in at $5.15 billion, up 23.1% on the year before. Operating income rose by 133% to $284.2 million in the meantime.

Trading around $22 per share, the market values Hertz at $8.8 billion. This values the equity in the firm at 0.8 times annual revenues and 10-11 times adjusted earnings.

Hertz does not pay a dividend at the moment.

Some Historical perspective

Shareholders in Hertz have seen a lot of volatility over the past few years. Shares were sold at $15 per share back in November of 2006 when Hertz went public, to rise to highs of $27 a year later. Shares fell all the way to $2 in 2009 on the back of the crisis and a leveraged balance sheet.

From that point in time shares steadily rose to highs of $28 earlier this year. On the back of the bad news from last week, shares have fallen some 20% to current levels around $22 per share.

Between the calendar year of 2009 and 2012, Hertz has increased its annual revenues by some 27% to $8.8 billion. The company turned a large loss into a $243 million profit last year.

Investment Thesis

It was not just the revised guidance which Hertz communicated to the market last week, causing nerves among investors. At the start of the week the company announced that CFO Elyse Dougles stepped down from her role, to be replaced by David J. Rosenberg. In hindsight these moves can't be seen in isolation, of course. Note that Hertz also announced that it will add the popular Tesla (NASDAQ:TSLA) Model S to its rental offerings.

Investors reacted strongly on the back of the downwards revised guidance. It is not the cut alone, but some are questioning the sudden CFO departure as well, although the company cites re-location issues as a reason behind the resignation.

Anyway, full year earnings are expected to come in between $1.68 and $1.78 per share, implying a guidance cut of 10 cents per share, valuing the business at 12-13 times GAAP earnings.

Government austerity and lower consumer confidence, both impacting domestic travel, are negatively impacting Hertz's business. Airport rentals in particular make up roughly half of the company's total revenues. Therefore the strategic deal to acquire Dollar Thrifty was so important. Dollar Thrifty has extensive airport operations as well, but it focuses on the leisure tourist clients, rather than mostly business people.

Yet the statement issued by the company forecast a slightly weaker market and possibly the integration of Dollar Thrifty's fleet might impact re-sale prices as well, indicating the integration might not be as smooth as the company has hoped.

Note that Hertz finally received approval from the Federal Trade Commission back in July in favor of the deal. As a concession, Hertz needs to divest the Advantage brand and 29 rental locations, peanuts for a company with over 10,000 rental locations worldwide.

Back in August of 2012, little over a year ago, I last took a look at the company's prospects when the business acquired Dollar Thrifty. I concluded that the deal would create long term value for the company.

Shares ended up doubling within a year's time to highs around $27 this summer. At the time of writing, I argued that investors would be attracted to sizable synergy estimates and a modest impact on leverage ratios.

I concluded that long-term investors, having confidence in the economy's prospects, could make a leveraged bet on the future. Now with shares trading some 60-70% above the levels at the time of writing last year, I'm much more cautious. The lack of dividends and high leverage make me hesitant to invest, in this very cyclical business, with operations being valued at 12 times earnings.

This company is no longer a screaming buy as it was in hindsight last year, but shares are more likely to move along with the general market. I see few reasons for outperformance versus the wider market.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.