Hertz Global Holdings: Buy The Turnaround

Summary

• HTZ is breaking out higher.
• Management is leading a strong turnaround effort.
• I am buying stock in the name.

Hertz Global Holdings (NASDAQ:HTZ) is attempting to turn around its operations after years of struggling and price declines. Its stock price looks to have formed a bottom, with recent upward price momentum near its financial crisis lows. Management is turning around its fundamental operations, focusing on in-demand services, while also managing operational efficiencies. I am buying stock in the name as a potential long-term turnaround play.

Price Action

HTZ's share price declined significantly in recent years as its operations deteriorated and its relative debt load increased. Investors pushed shares down from roughly $120, to under $20. Changes in management though, have led to a turnaround in HTZ operations since mid-2017. This led to a bottoming pattern around levels not seen since the financial crisis.

Considering the improving fundamentals, HTZ's recent breakout higher, following a period of consolidation, is significant. $21.5 had acted as a price resistance point over the last month, which was surpassed on Thursday afternoon. I am buying stock in the name following the break higher, with a stop-loss point at $20. The company's turnaround effort is in its beginning phases but looks to be gaining traction. This makes it an attractive risk/reward investment currently.

Fundamental Narrative

HTZ is attempting to turn around its operations by capturing more profitable trends, while also improving operational efficiency. Over the last quarter, the company improved on satisfying customer fleet preference, enhancing service quality, while developing brand strategies to secure new and more frequent renters, according to its earnings call. HTZ's progress is beginning to show up in its results, with the second half of 2017 achieving higher year-over-year U.S. rental pricing, utilization rates, revenue per unit and customer service scores, as well as lower monthly depreciation per unit. This momentum is broad-based across the organization, leading to increased investor optimism, and thus, share price appreciation.

The company's procurement process has created a favorable mix of SUVs and premium vehicles that reflect customer demand and lead to upsell opportunities, according to its earnings call. HTZ successfully met its negotiating objectives on model-year 2018 cars to offset industry residual value declines. Additionally, the company seamlessly managed a growing fleet of second-life vehicles to support the rapid expansion of a new customer opportunity to transportation network companies and their ride-hailing drivers.

HTZ's fleet sales last year led to the largest fleet rotation in company history, optimizing sales channels for the best residual values. The company moved a record number of used cars to its 80 retail lots, the highest return re-marketing channel where they averaged a net benefit of more than $1,000 per unit over auction. This is all accretive to the bottom-line and allows management to continue to meet market demand for newer and differentiated offerings.

Management is also exploring a new dynamic contribution management system, helping to sort, analyze, and optimize rates. They have introduced an additional proprietary pricing system that reacts more quickly to market rate variations. The early outcomes are encouraging, according to its earnings call.

Going forward, management is focused on improving its marketing campaigns to drive further revenue growth. HTZ will be initiating marketing campaigns to encourage more customers to enjoy its upgraded fleet choices, new value-added services, as well as its more flexible rewards program. This effort will hopefully contribute to the momentum of its business.

Below is a chart of HTZ's revenue and earnings per share. Although revenue has been flat the past few years, earnings are increasing due to operational efficiencies. Over the second half of the year, a tighter fleet, improved vehicle selection, and more locations offering its Ultimate Choice service offerings allowed the company to begin executing its strategy to align its fleet capacity to the most profitable segmental demand. These improvements were supported by more intuitive price and demand forecasting tools, all of which drove revenue higher and fleet costs lower, according to management. Collectively, management is in the process of turning around an ailing business. As signs of success begin to show, investor sentiment should similarly improve, leading to share price appreciation.

Conclusion

HTZ is attempting to turn around its operations after years of struggling and price declines. Its stock price looks to have formed a bottom, with recent upward price momentum near its financial crisis lows. Management is turning around its fundamental operations, focusing on in-demand services, while also managing operational efficiencies. I am buying stock in the name as a potential long-term turnaround play.

Analyst’s Disclosure: I am/we are long HTZ. 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.