Most investors probably couldn’t care less that Hertz (OTCMKTS:HTZGQ) announced its third-quarter earnings on Nov. 9. For those who do care, they had none. A terrible quarter was expected, and it was delivered. Down went Hertz stock to a low of $1.03 before bouncing back later in the week.
I don’t know about you, but I’m tired of putting lipstick on this pig. I wish the bankruptcy court would just put Hertz’s stock out of its misery already. Be done with it.
Perhaps, that’s a little harsh, but I doubt anyone who lost serious money on the rental car company has stuck around to see how this tragedy plays out.
The interesting thing is this entire bankruptcy situation could have been avoided if its management had a bit of foresight and vision.
Here’s why.
Lululemon and Under Armour
Before you wonder if I’ve lost my marbles, let me explain.
In April 2017, I argued that Lululemon (NASDAQ:LULU) and Under Armour (NYSE:UAA) should join forces to fight Nike (NYSE:NKE), the apparel industry’s version of the Evil Empire.
Just kidding. I like Nike. I recommended it on Oct. 27, along with nine other consumer stocks to buy. But I digress.
Here’s my rationale for the combination:
“I thought VF Corp (NYSE:VFC) would be the company to make a play for Lululemon, but it has had its own troubles to deal with, and that has kept the apparel conglomerate relatively quiet on the M&A front. That could change at any time, so the fact Under Armour is in its weakest position since its founding in 1997 makes this an opportune time for LULU to consider a deal,” I wrote in 2017.
“Under Armour and Lululemon ought to come together to fight Nike and Adidas. Both firms currently face serious challenges as they cope with growth. Together, they would make a formidable team.”
Even Lululemon founder Chip Wilson, who at times has been at odds with his former company despite the fact it’s made him very rich, felt the tie-up made sense.
My reason had to do with the fact that LULU had a strong presence with women, while Under Armour did well with men. Together, they could successfully go after both sexes.
More importantly, Under Armour had an enterprise value of approximately $12.8 billion, while LULU’s enterprise value was $8.4 billion. Fast forward to today; their positions have reversed. Lululemon’s enterprise value is $43.3 billion and Under Armour’s is $7.3 billion.
Even if Kevin Plank, Under Armour’s founder and then-CEO, had offered a 50% premium for LULU, he might have acquired it for $12 billion, almost an identical amount to Under Armour’s enterprise value at the time.
It’s easy to say in hindsight, but I said it back then, and I meant it. In my estimation, Lululemon could have made Under Armour, a better company. Now, we’ll never know.
With or without Under Armour, I’ve long been convinced LULU was the real deal.
The Hertz Stock Savior
It definitely wasn’t Carl Icahn who took a $1.6-billion bath on it before exiting.
The savior I’m thinking about is Uber (NYSE:UBER) or Lyft (NASDAQ:LYFT) or one of the other ride-hailing companies that exist in North America and elsewhere.
Looking back at Hertz’s annual results over the past decade, 2013 was its most successful year from a financial perspective, generating $394 million in operating income from $9.2 billion in revenues. In the subsequent seven fiscal years, it lost money in five of them.
Where was Uber in 2013? VentureBeat pegs its August 2013 valuation at $3.5 billion based on a $350 million capital raise.
In 2013, rather than make a play for an innovative start-up, Hertz chose to acquire Dollar Thrifty Automotive for $2.3 billion. Hertz originally offered $41 per share in April 2010; it settled on $87.50 in November 2012, double its original offer. The Federal Trade Commission finally signed off on the deal in July 2013, almost three years after beginning the M&A process.
What an unbelievably expensive deal both in terms of what the acquisition brought to Hertz and the focus it took from its daily operations. Acquisitions are tricky at the best of times but rarely do they turn out when they take three years.
At the end of 2013, Hertz had a share price of $25.91. Based on 447.7 million shares outstanding on Dec. 31, 2013, and net debt of $15.9 billion, it had an enterprise value of $27.5 billion, 13 times Uber’s valuation at the time.
Hertz first flirted with ride-hailing in 2015, when it partnered with Lyft to offer rental cars to its drivers daily, weekly, and monthly. It added Uber and expanded its partnership with Lyft in 2016.
In the company’s August 2019 conference call, CEO Kathryn Marinello believed it was ready to grow Hertz’s business:
“We dropped our share over the last several years based on taking our eye off the prize. Frankly, I think we’re just winning our fair share back,” Marinello said.
That clearly wasn’t the case. It’s now struggling to find its place in the world.
It could have acquired either Lyft (current market capitalization of $11.6 billion) or Uber ($81.7 billion) in the not-to-recent past for much less than their current market caps.
That’s a management failure if there ever was one.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
