Should I Buy Hertz? 3 Pros, 3 Cons

The company is feeling the pressure in Europe.

   
Should I Buy Hertz? 3 Pros, 3 Cons

HertzLogo Should I Buy Hertz? 3 Pros, 3 ConsAll in all, Hertz (NYSE:HTZ) posted a solid earnings report for the second quarter on Monday. Net income came to 21 cents a share, up from 12 cents a share in the same period a year ago. Revenues also rose by 7% to $2.23 billion. The Street was looking for 32 cents a share and $2.23 billion. Yet Hertz’s performance wasn’t enough to excite investors as the stock has fallen by about 4% to $11 on Wednesday afternoon.

Actually, the past year has been tough for the company. The stock is down nearly 22%.

But with a much better valuation, is now a good time for investors to take a drive with Hertz? To decide, here’s a look at the pros and cons:

Pros

Powerhouse. Hertz is the largest global airport car-rental brand. It has roughly 8,500 locations across 150 countries.

Hertz also has one of the world’s largest equipment rental businesses, offering items like small tools and even earth-moving equipment.

Transformation. Over the past five years, Hertz has undergone a major restructuring. Some of the efforts have included efficiency programs and the implementation of the Lean Six Sigma processes.

As a result, cash flows have continually improved. In the latest quarter, they came to $666.4 million, which was up by $145.1 million over the past year. Hertz has about $1.4 billion in corporate liquidity, which should be enough cushion if the global economy suffers a downturn

Innovation. While Hertz is an aggressive cost-cutter, it still understands the importance of investing in its infrastructure, technology and customer service. To this end, it has state-of-the-art on-board navigation systems, SiriusXM (NASDAQ:SIRI) satellite radio services and programs like the Hertz Gold Choice.

In 2008, Hertz launched a service that allows customers to rent cars by the hour or the day. It’s a way to get a piece of Zipcar’s (NASDAQ:ZIP) booming market.

Cons

Competition. Hertz faces a myriad of rivals. The main players in the U.S. include Avis Budget Group (NYSE:CAR) and Enterprise Rent-A-Car. In Europe, the competition includes Avis Europe and Europcar.

Global Economy. Hertz’s business is highly cyclical because it’s tied mostly to the levels of airline passenger travel. Unfortunately, the global economy is showing signs of a slowdown. In the second quarter, Hertz noted that it experienced problems in Europe, such as with excess fleet supply and more pricing pressure.

Value of the Fleet. The number of “program cars” has been declining over the years, reaching 48% of Hertz’s fleet at the end of 2011. These cars are subject to repurchase contracts. However, for the remaining cars, there’s a risk that their value will decline, which could result in losses. This is likely to be exaggerated if the global economy continues to falter.

Verdict

Hertz is certainly in good shape, especially since it has been smart to improve its cost structure and find productivity gains. The company’s acquisition of Dollar Thrifty (NYSE:DTG) should also add more scale.

Yet it’s certainly vulnerable to the global economy — and it looks like that situation is not improving. Perhaps the drop in the stock has already discounted this. But the problem is that there will be few catalysts to get the momentum back, at least during the next couple of quarters.

Given all this, the cons outweigh the pros on the stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/08/should-i-buy-hertz-3-pros-3-cons/.

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