A week and a half ago when Hertz Global Holdings, Inc (NYSE:HTZ) posted horrifyingly bad first quarter results, HTZ stock fell 14% to reach a new eight-year low.
That’s not a misprint.
Hertz’s loss of $223 million was significantly larger than the year-ago loss of $51 million, at least partially in thanks to the shrinking top line.
While the knee-jerk response was a bearish one, CEO Kathryn Marinello’s assured investors during the conference call that 2017 marked the worst of the pain, and the 2018 would mark the beginning of better days. Between the stock’s beat-down and the top executive’s optimism, Hertz had at least some people looking at it as a bargain rather than a liability.
Those glimmers of hope have been decidedly extinguished in the meantime, however. As it turns out, most everyone has decided HTZ stock is cheap — and getting cheaper for a reason.
Hertz Can’t Win for Losing
For the record, it’s not as if Hertz shares were unduly taken to eight-year lows last week (and then extended them the next week). Revenue and income both began to slide lower in 2015, with the pros calling for a swing to a loss this year. Those same analysts to expect this year’s projected loss of 46 cents per share of HTZ stock to swing back to a healthy per-share profit of 82 cents next year, aligning with Marinello’s assessment.
Nobody else seems to believe it.
Prior to the release of the company’s Q1 numbers, 25.6% of Hertz’s outstanding shares were sold short. The 27% slide after that day’s tumble can only mean the market is even more pessimistic than it was at the time, having had a chance to mull the situation
To that end, what gives? How bad could it really be?
In all fairness, it’s not the pace of top line’s deterioration that’s so terrifying. While it’s measurably moving in the wrong direction, investors have seen worse. What’s so concerning is that, so far, HTZ seems powerless to do anything about it — pricing power just isn’t what it used to be.
One only has to look at the recent results reported by rival Avis Budget Group Inc. (NASDAQ:CAR) to get a sense of this waning demand and/or oversupply. While Avis has continued to grow its top line where Hertz hasn’t, its growth pace is clearly slowing, and earnings began to fall last year. Analysts expect another lull in the bottom line for 2017.
HTZ vs CAR
That being said, Hertz is undoubtedly the weaker of the two, albeit for a handful of understandable reasons.
One of them is what in retrospect is the ill-advised 2012 acquisition of Dollar Thrifty. That $2.6 billion all-cash deal may have pushed the company over the debt cliff, so to speak. Although the intent was to shrink the number of the car-rental market’s offerings and subsequently facilitate higher prices, rental rates have dropped since then. The quarterly burden of carrying $14 billion in debt on Hertz’s books, however, hasn’t.
That $14 billion in debt is against a market cap of less than $1 billion and annual revenue of less than $9 billion, by the way.
The end result is an imploding credit rating that’s making it more difficult and more costly to do the refinancing it must do. Hertz’s existing debt is rated as junk, and it could cost on the order of 10.5% to garner the new unsecured debt it needs to reconfigure and renew its rental fleet.
The math simply doesn’t make sense for Hertz, and by extension, it doesn’t make sense for HTZ stock. Waning car rental prices coupled with rising interest expenses at the same time used car prices are poised to fall (resale values matter, as they offset Hertz’s new car-purchase costs) set the stage for more losses. All three are almost entirely out of the company’s control at this point, and all three don’t look as if they’re about to abate anytime soon.
That’s the way analysts see it. Over the course of the past month, three of them have lowered their full-year profit outlooks. Morgan Stanley cut its price target on HTZ from $15 to $12 after the Hertz’s first-quarter report.
Nobody is able to find much they like about the company. Most seem to have doubts 2018’s turnaround will be as robust as Marinello suggests it will be … if there’s a turnaround at all.
Bottom Line for HTZ Stock
No, Hertz isn’t apt to sink to a price of zero, but only because a competitor may snatch it up — despite its debt — when the time is right. Or more likely, when an activist investor decides enough is enough.
Taking the company private is another possible outcome.
None of those ends are necessarily bullish for the stock itself, however, as they’d likely transpire at a price not much better than the current value of HTZ stock, at best. Any of those outcomes would be more akin to putting the patient out of his misery than actually healing the sick.
In other words, even the most plausible turnaround scenario for 2018 doesn’t make Hertz stock a buy here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.