Hertz Global Holdings, Inc (NYSE:HTZ) has been a bit of a dark horse this year. The stock steadily declined 47% for the first half of the year when the broader market (S&P 500) posted gains of over 8% during that period.
The deck seemed stacked against the $2 billion rental car company operating under the banner of well-known brands such as the eponymous Hertz, Dollar and Thrifty. All the attention has surrounded to ride-hailing/ride-sharing unicorns like Uber (and to a lesser extent Lyft). With the ease of intercity travel for leisure and business now just a few taps away and without all that burdensome paperwork, many felt Hertz was doomed.
Legendary investor, Carl Icahn, has always been long Hertz though. He’s stuck to his guns. And his investment in HTZ has made a heck of a comeback. Since the beginning of July, Hertz has definitively trounced the indices. The stock is up 98% compared to a 3% for the S&P 500 and just over 4% for the Dow Jones.
What’s Changed at HTZ?
Asked another way, what has Icahn seen that the bears have missed?
For one, the perception of Uber and Lyft being direct competitors that will take business away from Hertz. Bears presumed that rental companies would get put out of business as Uber and Lyft continued to lure away passengers and that this would lead to revenue falling off a cliff.
This presumption gets turned on its head with what actually appears be a big opportunity for Hertz to be a supplier of vehicles to Uber and Lyft. The tech companies with the logistics and consumer interface savvy will run the platforms and control pricing and user demand. Hertz will then provide the brawn, if you will. Passengers may find themselves increasingly riding in a car sourced from Hertz.
Keep in mind that Icahn is also an investor in Lyft to the tune of $100 million. Needless to say he knows the space.
Why Will HTZ Be a Winner in Car Leasing?
The advantage for Hertz is in its fleet management system. It’s a capital-intensive business that can quickly become a loss generator is the management isn’t finessed.
Uber has run right into this problem. That’s why they’re considering the sale of their U.S. car-leasing business or other options to stem the bleeding. According to Reuters,
“the plan [to sell the car-leasing unit] comes after Uber executives were informed that losses were $9,000 per car on average, steeply above the previous estimates of around $500 per car, according to the report.”
As Uber looks to end its in-house leasing program, it’s going to need a quick solution, at least in the short-term. HTZ is an obvious choice given their history of doing business together. Last year, the companies had struck an agreement for Hertz to offer short-term auto rentals to Uber drivers.
The Bottom Line on HTZ
This is a very real opportunity for Hertz, who has already begun to see positive results. Second quarter earnings proved as much. “As planned, the Company reduced its total average fleet by 1% in the second quarter compared with a year earlier, as the number of core rental vehicles declined by 3%, partially offset by an increase in the vehicles dedicated to the ride hailing fleet.” (emphasis mine). No hard numbers yet, but significant enough to highlight in the earnings call.
The future is not nearly as dark as the bears make it out to be and potentially very bright. It’s a story of work with ride hailing companies and of shifting its model to ride the trends instead of fighting it.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.