Hertz Global Holdings Inc (NASDAQ:HTZ)
To borrow a phrase from Hertz’s advertising campaign from the 1960s, “the driver’s seat” is where investors will be once the company has been rejuvenated.
Hertz today is not the same as Hertz in the past. Due to its recurring pricing disputes, which exacerbated the boom-and-bust nature of the business and earned it a reputation as a bad actor in the market up until the year 2020, when it declared bankruptcy, the company. Currently, automobile rentals are dominated by three financially disciplined companies— Hertz Global Holdings (NASDAQ:HTZ), Avis Budget Group (NASDAQ:CAR), and the private Enterprise Rent-a-Car—that control 90% of the U.S. market, resulting in a more stable and better-managed business than ever before.
HTZ Stock Price Prediction
It would appear that Hertz is the most advantageous option. It has maintained a very high level of profitability, is ahead of its competitors in the addition of electric vehicles to its fleet, and has repurchased more than thirty percent of its own stock since it emerged from bankruptcy in the middle of 2021. Hertz is currently trading for $19, which represents a modest discount to Avis and eight times the expected earnings of $2.32 per share for the year 2023.
Andy Taylor, a portfolio manager at Carronade Capital Management, which owns the stock, said that “Hertz trades at a single-digit P/E, has low leverage, and is rapidly buying back shares.” Carronade Capital Management is an investor in the company. “The industry has realized that cash generation is more valuable than market share that is not profitable.” He points out that this leads to an increase in the valuation of stocks whenever it occurs.
$11 billion of the $2 billion in asset-backed debt owed by Hertz is covered by its fleet, which has a total value of $2 billion. This leaves Hertz with a net corporate debt of $2 billion.
Why does Hertz trade so cheaply? The nature of the tourism industry, which is characterized by alternating periods of prosperity and hardship, is contributing to the problem. Other worries have contributed to the stock’s decline as well. Because the used-car market has leveled off following a strong increase in prices over the two years that ended in the middle of 2022, and because Hertz needs to sell older vehicles to make place for new ones, it is anticipated that profits would decline by nearly forty percent this year.
The fact that Hertz has a cushion of one billion dollars in its asset-backed bonds is a positive indicator. This cushion indicates that the market value of the fleet is one billion dollars higher than the carrying value of the cars. This provides Hertz with the ability to withstand any downturn in the pricing of used cars.
On the company’s results conference call from the previous week, the mood was positive, and Kenny Cheung, the chief financial officer for Hertz, elaborated on that sentiment in comments to Barron’s. He mentioned that last Sunday’s air travel in the United States was 20% higher year over year, and that demand from corporations has now returned to 80% to 85% of what it was in 2019. The number of wealthy tourists from other countries that visit the United States and rent automobiles at rates that are 50–55% higher than the levels seen in 2019 is holding steady. All of that suggests that there is additional room for development.
According to Cheung, the number of “transaction days,” which is a measure of volume and typically decreases by 5% in the first quarter in comparison to the fourth quarter, is now on track to remain unchanged. Chris Woronka, an equity analyst at Deutsche Bank, anticipates that Hertz will generate $1 billion in free cash flow this year, the majority of which, in his opinion, will be used for the company to repurchase its own shares.
He says, “There’s a lot to admire about Hertz,” and I agree with him. “The stock is cheap relative to every metric you choose to consider.” He recommends buying the stock and sets a price target of $27.
It’s possible that concerns about the cost of used cars are also exaggerated. According to Cheung, prices have gone up consistently over the past five weeks after falling around the end of 2022.
The other concern is that the cost of renting a car, which is currently 40% higher than it was in 2019, may drop from its current level of approximately $62 per day, which was the average for the fourth quarter. Woronka, on the other hand, is not optimistic about the pricing situation. He claims that customers have been accustomed to paying greater rates.
Hertz, much like Avis, does not pay a dividend, yet the company has enough money to pay out 75 cents per share annually, which would yield 4%. When Barron’s asked Cheung about a dividend, he responded by saying that “everything is on the table.”
Yet, in comparison to its rivals, Hertz may have a significant advantage due to the company’s early adoption of electric vehicles (EVs). It placed an order for 100,000 Teslas in the late year of 2021, giving it a head start over Avis and Enterprise. The company aims to have 25% of its fleet electric by the end of 2024, with its fleet currently consisting of more than 40,000 Teslas, or 9% of all the vehicles it owns. Late in the year 2022, Hertz reached an agreement with General Motors (GM) to purchase 175,000 electric vehicles (EVs) over the course of the next five years.
The electric vehicles (EVs) strengthen Hertz’s environmental credentials while also bringing in a tidy profit for the business by commanding premiums of $25 to $30 per day over the going daily rate. Many of Hertz’s corporate clients are eager for their staff to rent EVs. In addition, the ease of maintenance that is required for electric motors is significantly lower as compared to that required for internal combustion engines.
Electric vehicles’ higher profits and lower operating costs fit with Hertz’s newly discovered sense of discipline. After 30 years at Goldman Sachs, where he was most recently the CFO, CEO Stephen Scherr was promoted to the top role a year ago, and since then, he has placed an emphasis on creating sufficient profits. He was given a huge compensation plan that has the potential to pay him more than $200 million, most of which is in stock, provided share-price targets are met in the future years, and he will be motivated to get the shares moving higher because of this.
Investors also have the opportunity to participate in Hertz through warrants that are offered at attractive prices. Warrants are essentially long-term call options that grant the holder the right to purchase the stock at a price that has been fixed in advance. They can be purchased for approximately $9.50 and will entitle the holder to purchase the shares at $13.80. The warrants, which are traded using the ticker symbol HTZWW, have an extremely long maturity of 28 years, which is an attractive feature. They ought to be regarded as a less expensive substitute for the common stock.
It is always a good idea to rent a car from Hertz, regardless of how you play the game.
Featured Image: Pexels @ Matheus Bertelli
