It’s been a terrible summer for Hertz (NYSE:HTZ). And frankly, for holders of HTZ stock, this is probably going to get much worse.
Let’s be honest. The prudent investment move would have been to sell those shares in May and never look back. May is when the storied rental car company filed for bankruptcy and began a trip to render its stock worthless. As in nothing. Zero.
This is not an outcome anyone would like to see – other than its rivals, perhaps.
How Did HTZ Stock Get Here?
Hertz is a name well known for renting autos. As a longtime player in the car-rental field, the Florida-based company’s gold logo is widely recognized behind airport counters and standalone rental centers across the nation.
The car-rental business is a competitive one and consumers have a lot of choices. In addition to the list of leaders that travelers can name, many large cities also have some companies that are lesser known and are content to exist on the margins. And since Americans love to travel and then drive, renting cars to them usually rolls right along.
Until it doesn’t.
The arrival of the novel coronavirus last winter set in motion several impacts, headlined by the loss of more than 200,000 lives in the U.S. It is a devastatingly huge number. Or, as President Donald Trump asserts, “It is what it is.”
In response, many people stayed close to home. Global travel essentially stopped. Airlines parked airplanes. Normally bustling airports took on an eerie emptiness.
And, those car-rental counters had no customers.
The Bankruptcy Dance
Making money is much easier when times are good. A steady economy makes most companies look better. But a bad economy puts pressure on all businesses. It’s not as easy to look good when times are tough. This kind of situation separates the companies that were ready from those that weren’t prepared.
Hertz executives took the company into bankruptcy in May when they filed for a Chapter 11 restructuring bid. This process will quickly show executives what it’s like to have to answer for almost everything – especially when it comes to spending money.
For example, Hertz executives paid $16.2 million to around 300 employees shortly before the company filed for bankruptcy. These were termed retention payments meant to keep the employees on the job during the uncertain course of bankruptcy.
The company wasn’t done handing out money, however.
Hertz also planned to pay $5.4 million in bonuses to its top 14 executives – yes, they also were paid rentention payments, too. Just what these executives did to warrant those bonuses is not clear. From here, though, I’d have to say running a company into the ground hardly shows an executive bonus of any kind is justified.
Bankruptcy Judge Mary Walrith said the bonus plan “seems offensive.” As reported by Yahoo Finance, she also is questioning the retention payments.
“More has to be done to show why employees who got retention bonuses and agreed to stay with the company are not going to do their best to see that the company survives and succeeds,” the judge said.
HTZ stock holders, meanwhile, aren’t in line for bonus payments. The company’s second-quarter earnings report from the company was, well, rather dismal.
The company reported a 67% revenue drop and a loss of $587 million. I’m really surprised the company didn’t post a larger drop in revenue given the circumstances created by Covid-19. Nevertheless, the company’s managers have displayed some skill at hoarding cash. As of June 30, Hertz said it had $1.4 billion on hand.
In light of the proposed executive bonus payments, we see why they held onto all that cash.
Bloomberg recently reported Hertz is negotiating with potential lenders for a loan to get through the bankruptcy process.
The Bottom Line
Hertz is taking shareholders down a dead-end road. Executives seem laser-focused on paying themselves. This is despite the company being on life support, as my InvestorPlace colleague David Moadel wrote recently.
Yes, I know, the HTZ stock is cheap. It is cheap for a reason. These days there are plenty of people out there who are drawn to cheap stocks. But in this case, that siren call is really a shrill warning to avoid a collision with reality.
If you own HTZ stock and keep it during Chapter 11 in the hope that all works out in the end, you probably will end up with worthless shares. This stuff is circling the drain. Sell that stock. And, anyone thinking of buying shares of HTZ would be far better off to buy and enjoy a nice cup of coffee at that well-known coffee company.
On the date of publication, Larry Sullivan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.