There was a point not too long ago when car-rental companies like Hertz Global Holdings, Inc (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR) were reliable revenue machines, making CAR and HTZ stock decent investments.
As they say, though, nothing lasts forever. Time and technology have changed the landscape of the vehicle rental market, not the least of which is the rise of ride-hailing alternatives like Uber, or car-sharing options such as Zipcar (while Zipcar is owned by Avis, there are bunches of similar independent companies).
But it might be a little premature to shelf these companies for good. Shares of rival car-rental company Avis fell nearly 10% today after it fell short of its Q2 estimates — and dished out guidance notably less than what analysts had been modeling. However, HTZ stock partially reversed its Avis-inspired 6% selloff from Tuesday in the after-hours session, gaining 3%.
The prod was the release of Hertz’s so-so second-quarter numbers and encouraging third-quarter outlook.
Hertz Earnings Recap
For the quarter ending in June, Hertz turned $2.224 billion worth of revenue into a loss of 63 cents per share. Analysts were expecting the company to swing to a loss of 18 cents per share versus a profit of 41 cents per share in the same quarter a year earlier … reflecting rising costs and the waning resale value of its fleet of used cars. Revenue was expected to slide from year-ago levels of $2.28 billion to $2.22 billion last quarter.
CEO Kathryn Marinello commented on the numbers:
“We have made significant progress in the first half of the year, executing on our operating turnaround plan. Of course, the hard work always comes before the pay off as reflected in our second quarter results, where increased spending to fix areas of weakness and invest in areas of opportunity were exacerbated by a challenging vehicle residual environment in the U.S.”
Hertz’s U.S. operation was the weaker link. Average revenue per day fell to $41.26 from the year-ago RPD figure of $42.11. Average revenue per user was down year-over-year as well. Those same measures from its international division were stable, or down only slightly.
Work in Progress
Though the dark cloud of competition like Uber and the likes of Zipcar have weighed on Hertz and Avis for months — going on years — now, that headwind may finally be stabilizing, easing up the pressure on traditional car rental outfits.
That’s the way JPMorgan analyst Samik Chatterjee see it anyway, initiating coverage on both CAR and HTZ stock last week noting that investors may have overestimated how much trouble the vehicle rental industry was actually in. Though he prefers Avis over Hertz, calling the former an “Overweight” and the latter a mere “Neutral,” the broad optimism was still enough to send HTZ stock up a healthy 10% on Friday and up another 6% on Monday.
“With existing scale of fleet operations, rental car companies strike us as natural owners of car sharing solutions, with new entrants likely struggling to achieve threshold volumes in a fragmented market to reach profitability. Moreover, we believe the advent of fully autonomous driving will level the playing field for rental car companies and ride share solutions, making them one and the same, additionally necessitating investments in fleet management services by ride share companies.”
He’s right, for better or worse.
In fact, as was noted, AVIS has already tiptoed into that market with Zipcar. Hertz has further to go on that front, however, and though Chatterjee is encouraged by the company’s “improving execution and correction of recent missteps,” time and money spent on fixing things is time and money not spent on growth-oriented initiatives, leaving the company stuck in legacy businesses that are slowly dying.
The disparity between Hertz and Avis is already so great that Barclays believes bad news for Hertz is actually good news for Avis.
Last quarter’s numbers from Hertz effectively confirm it’s got more repair work to do, and needs to beef up its efficiency.
Looking Ahead for HTZ Stock
Though Chatterjee is optimistic that ongoing changes will rekindle some sales and earnings growth for Hertz, other analysts aren’t as convinced. The pros are, or were, calling for sales growth of 1.1% for the quarter underway, leading to a profit of $1.61 per share of HTZ stock. That’s barely better than the $1.58 per share earned in the comparable quarter a year earlier.
Those guesses may be beefed up soon, however, in light of the company’s guidance. Without offering any fiscal details, the statement from the company added:
“In the U.S. rental car segment, the Company is encouraged by preliminary third quarter 2017 total revenue per day trends. In July, total revenue per day is expected to have increased by approximately 3% compared with July 2016. July transaction days are estimated to have declined by about 4% as the Company targets higher-quality revenue. With only approximately 55% of reservations booked, August is less clear, but early indications suggest trends similar to July. September is expected to be seasonally weaker, but the Company will continue to focus on fleet capacity discipline and revenue quality.”
That was enough to stop Tuesday’s bleeding from HTZ stock in its tracks, setting the stage for a bullish Wednesday.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.