As I write on Hertz Global (NYSE:HTZ) I am reminded of the early days in my investing career. When I started investing more than a decade ago, I was tempted to buy stocks that have plunged. Hoping for a bounce-back, as many are doing with HTZ stock.
I also looked to average down on stocks that have been on a steady decline. Over time, through general observation among the investing community, I understand that a lot of investors commit this grave mistake.
HTZ stock has plummeted by 91% in the last year. I don’t see any revival and the stock is likely to be worthless. Even if investors are looking for a stock that purely a speculative bet, there are better ideas around.
Just as an example, Inovio Pharmaceuticals (NASDAQ:INO) stock is a speculative bet that can deliver stellar returns.
One news on positive outcome of clinical trials related to the COVID-19 vaccine can send the stock surging. Also, within the car rental industry business, Avis Budget Group (NASDAQ:CAR) is a better medium to long-term investment option.
Back to Hertz, I am surprised that a company that has filed for bankruptcy was seeking to hand-out $14.6 million in bonuses to executives. The executive bonus was however rejected by the bankruptcy judge.
With this overview, let’s look at the financial factors that make HTZ stock an avoid even after the big plunge.
Fundamentals in Disarray
It goes without saying that the balance sheet will be untidy for a company that has filed for bankruptcy. However, I am looking at the financials from the perspective of hopes for revival in the business.
For the second quarter of 2020, the company reported a negative adjusted EBITDA of $470 million. For the same quarter, the company’s cash paid for interest was $260 million. However, business was impacted by the pandemic.
If we look at Q2 2019, the company’s adjusted EBITDA was $156 million. For that period, the cash paid for interest was $353 million. With an EBITDA-interest-coverage-ratio of 0.44, the company was in stress even when business was “as usual.”
It’s worth noting that the company reported total debt of $17.1 billion for December 2019. By June 2020, the company managed to reduce debt to $13.0 million. The company also has $1.4 billion in liquidity.
However, my concern is as follows – For Q2 2020, the company reported a book value of $12.1 billion for revenue-earning vehicles. Considering a total debt of $13.0 billion, the company’s loan-to-value comes to 107%. In other words, equity is worthless. In a liquidation scenario, creditors would consume all proceeds from asset sales.
Hertz has been in talks with two creditors for a potential loan of $1.0 to $1.5 billion. However, I don’t see this as a stock upside trigger. Cash burn is likely to sustain and as revenue generating vehicles are sold, operating cash flow will also decline.
Of course, debt restructuring is on the cards. But that does not ensure business revival. Importantly, can Hertz deliver margins and cash flow that does not get the company into trouble again?
I don’t see much hope on that front considering the competitive markets.
Concluding Thoughts on HTZ Stock
In May 2020, the American Car Rental Association reported a decline in business by “50% and 75% on average at the airport locations.” The pandemic will continue to limit non-essential travel and this is another headwind for Hertz.
Reduction of the fleet in international markets and the U.S. can help in lowering the cash burn. But the company still needs to have a plan to convince investors that the business can remain a going concern and deliver value.
While equity financing seems unlikely, the company will also struggle for debt financing assuming that there is no liquidation scenario.
Given these factors, I expect HTZ stock to continue trending lower. Considering exposure to the stock is most likely to ensure capital erosion.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
