Hertz (OTCMKTS:HTZGQ), formerly trading under the ticker symbol “HTZ,” is no longer in the form we used to know. And if this sounds like an obituary for Hertz stock, that’s because to some degree, it is.
Hertz has finally had the “Q” added to its ticker, as it gets relegated to the over-the-counter market.
The novel coronavirus wreaked havoc on all sorts of businesses this year. In some instances, it propelled them higher — like the so-called coronavirus stocks. In other instances, the threat of bankruptcy was real, but never came to fruition — such as for Penn National Gaming (NASDAQ:PENN) or Dave & Buster’s (NASDAQ:PLAY).
For Hertz, though, the economic impact was simply too much to bear.
Warning Signs Existed for Hertz Stock
Even before the bottom ultimately fell out, Hertz had issues. Like Chesapeake and many others before it, the company’s overwhelming balance sheet issues caused too many problems.
When you see a company with a $1 billion market capitalization and $20 billion in debt, that’s going to be a problem in a majority of situations.
Whether investors were burned by Hertz doesn’t matter at this point; what matters is learning from that experience. And yes, you can learn from an experience you didn’t personally partake in! (Trust me, it’s better that way).
Before the pandemic started, Hertz had current assets of $3.9 billion, current liabilities of $2.7 billion and long-term debt of $16.6 billion. This was at the year-end report for 2019 — well before Covid-19 came along.
At the time, the stock had a market capitalization near $2.25 billion.
If we glance at the income statement, we’ll see gross profit of $1.7 billion on $9.8 billion of revenue in 2019 — or 17.4% in gross margin.
After various operating expenses, we can shave about $1 billion of profit out of that figure, giving us operating margins of about 7.7%. By the time we get to net income, it’s just on the wrong side of zero, coming in at a loss of $58 million for fiscal 2019.
Moreover, a quick glance at the cash flow statement shows that Hertz was deeply in the red when it came to free cash flow.
What’s My Point at This Point?
So, what’s the point of diving through all of Hertz’s financials at this stage of the game? After all, the company has already been kicked off the regular exchanges and banished to the pink sheets.
The point is, with maybe five minutes of basic analysis, investors could have avoided this painful loss. Above may seem like a cherry-picked recount of a troubled business, kicking Hertz when it’s already down. That’s not true, though.
In the future, look at it this way:
- Determine the current ratio by looking at current debt and current assets. Consider the cash — is it enough to cover current expenses?
- Examine the long-term and total debt — in Hertz’s case, it was $16.6 billion and $18.9 billion in 2019, respectively. Take that into consideration against the company’s assets and/or market cap. Again in this case, Hertz’s debt was 8.4 times its market cap, which should have raise a dozen red flags.
- Poor margins and low or negative profitability means the company is not able to chop away at that debt and is just one recession or economic event away from biting the dust.
- Negative free cash flow means that the company is not properly leveraging that debt to generate cash…it’s using that debt to survive. That’s not good.
Folks, this is literally a five to ten minute basic analysis that will put you ahead of like 80% of other investors. We didn’t need to see a global pandemic coming to avoid Hertz. A quick glance at the debt, the income and the free cash flow solves most of the riddle for us.
In this case, we had a bloated balance sheet, poor margins, no profitability and negative free cash flow. And that’s all I needed to see.
Fool me once, shame on you (Hertz). Fool me twice, shame on me.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.