by Tom Taulli | March 18, 2014 2:32 pm
Hertz Global Holdings (HTZ) will spin off its equipment leasing division, which focuses on things like earth movers, air compressors, generators, pumps and construction-related trucks.
The deal is expected to bring in about $2.5 billion in cash, which will partly be used to retire debt as well as a $1 billion buyback of HTZ stock. The spinoff is expected to be completed by early 2015.
The news of the deal leaked out during the weekend. As a result, HTZ stock price rose about 5% on Monday. Despite this, the return for the year is still a disappointing -4%.
So given this, maybe it’s time to think about buying HTZ stock? Or is it better to hold off? To see, let’s take a look at the pros and cons:
Powerhouse: Founded in 1918, Hertz is the largest global airport car rental brand, with about 10,400 locations across 150 countries. In fact, Hertz also owns other top brands like Dollar and Thrifty. The spinoff of the equipment leasing business — which will be called Hertz Equipment Rental Corp., or HERC — will mean that HTZ will be able to focus more on the core business.
Innovation: Even though HTZ has engaged in lots of cost cutting, the company has continued to devote substantial resources to technology development. For example, because of its sophisticated in-car systems and Express Rent kiosks, it is possible for customers to get a car anywhere, anyplace and at anytime — without even visiting a counter! HTZ has also wisely focused on mobile. For Gold members, a customer can easily select a car by just tapping a photo of it on a smartphone.
Financials: HTZ is a strong cash generator. Last year, cash flows from operations came to $3.6 billion, up from $2.7 billion in the prior year. The company has continued to see gains from its efficiency efforts, such as Six Sigma techniques. True, the debt load is still a hefty $16.3 billion. But the spinoff will certainly be a help. Besides, the low-interest rate environment has allowed HTZ to support interest payments. And a large amount of the company’s costs are variable. So if there is a downturn, the company can easily pare back expenses and keep the cash flows robust.
Competition: Competition is intense. HTZ must fight against tough rivals like Avis Budget Group (CAR) and Enterprise Rent-A-Car. In Europe, the competition includes Avis Europe and Europcar. But over the past couple years, a variety of innovative car service operators have emerged, such as Uber and Lyft. These companies essentially allow people to use their own cars to provide rides. All in all, the trend could prove disruptive to the traditional rental business, especially because venture capitalists have been pouring substantial amounts of money into the category.
Systems: HTZ has been implementing an enterprise resource planning (ERP) system on a global basis. Ultimately, this should help provide for a stronger foundation — and a better understanding of the company’s finances. Yet the process has been rocky. Consider that the company had to recently delay the filing of its 10-K because of issues with the ERP system. In fact, HTZ also identified possible errors in the financials, which could require adjustments. Even though they are not expected to be material, they do raise concerns that HTZ stock has had sloppy practices.
Growth: For the most part, the car rental industry is mature. In other words, it is extremely tough to find new growth opportunities. Just take a look at the Q4 report for HTZ stock. Revenues rose by 10% to $2.56 billion, which was below the Wall Street consensus of $2.62 billion. As for the current year, HTZ only expects revenues to grow about 7.2%.
Again, the spinoff of the equipment leasing business makes a lot of sense. HTZ stock will certainly benefit from the influx of cash as well as the focus on the car rental business. Let’s face it, the competition is tough, especially from new-fangled online operators.
Unfortunately, it will be tough to find growth. Oh, and the valuation of HTZ stock is already on the high side, with a price-to-earnings ratio of 39. And HTZ stock doesn’t even offer a dividend yield.
So, should you buy HTZ stock? No — for now, there are no clear catalysts to get HTZ stock moving on the upside.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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