One of the biggest casualties of the novel coronavirus pandemic is the car rental industry. A symbol of the destruction is the Hertz (OTCMKTS:HTZGQ) bankruptcy. The heavily indebted 102-year-old car rental company was already struggling due to Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). Covid-19 just added to the miseries with the management finally throwing in the towel, filing for bankruptcy after the combination of nearly $19 billion of debt and some 700,000 idle rental cars. But in a strange development, Hertz stock is up 59% despite the bankruptcy proceedings.
This is a trend that we’ve seen a lot recently. Many retail traders are piling onto companies that filed for Chapter 11, essentially betting on the stock to rise in value and cashing in when the time is right. This is not investing; rather, it’s gambling plain and simple.
Institutional investors do not engage in such behavior. Instead, they use sound fundamental and technical strategies to understand where to park their capital.
Unfortunately, there is nothing you can do about this irrationality. At the moment, there are no SEC regulations that can stop retail investors from opening new positions in bankrupt companies. However, don’t let it draw you into a false sense of security.
Hertz and other bankrupt companies are still poison pills. My colleague, Josh Enomoto, laid out a very interesting trading strategy regarding Hertz stock. But as far as fundamentals go, there is nothing to see here.
How Did We Get Here?
When the pandemic hit the U.S. in full force, the rental car industry was dealt with a double blow. First, the pandemic led to a steep fall in business due to canceled travel plans. Second, resale values for used car fleets nosedived to record lows. This was particularly damaging for several companies. But Hertz suffered in particular because of its debt situation. Over the past five years, the company kept on piling on debt as ride-share companies kept eating away at its market share. Covid-19 was a perfect storm that was waiting to happen.
Used-car values in April hit their lowest levels in history. However, since the economy opened up, they recovered somewhat and rising more than 30% from April to September. Hertz is taking advantage of this trend, selling its fleet to drum up cash to pay down debt. People are wary of using shared transportation. Therefore I believe used car prices will keep on rising for the foreseeable future. That should help Hertz as it moves along.
What Caused Hertz Stock to Spike?
As I mentioned in the introduction, several bankrupt companies are experiencing rallies in the markets on the back of overzealous retail traders, mostly active on the Robinhood trading app. Apart from this, Hertz also recently said it secured $1.65 billion in debtor-in-possession (DIP) financing. That sent the stock skyrocketing, as many thought this was just the antidote the company needed to come out of Chapter 11 as a stronger entity.
However, the financing is expensive at LIBOR plus 7.25%. According to the company, up to $1 billion of the DIP can be used to provide equity for vehicle acquisitions in the U.S. and Canada and up to $800 million for day-to-day expenses. Hertz believes that DIP financing will be enough to ride out in 2021. However, that seems unlikely. By the company’s own admission; $999 million cash at the end of August was just enough to make it through December. Think about that – close to $1 billion dollars in less than six months.
Also, even though the travel and tourism industry is in better shape than it was just a few months ago, it’s not out of the woods. We are closer to a commercial vaccine, but it’s not like things will be back to normal in a matter of weeks. The financial projections that the company provided in a recent filing forecast demand at 79% in the next fiscal year. That is slightly below pre-pandemic numbers. I don’t believe these estimations are realistic, and neither should you.
Are Uber/Lyft Better Options?
We now turn our attention toward the competition. As mentioned in my intro, in large cities, a combination of public transit and rideshare companies like Uber and Lyft contributed to substantial losses for the rental car industry. Although the pandemic was equally devastating for rideshare companies and car rentals, things are starting to look up.
Uber lost $1.1 billion over the last three months. However, gross bookings only fell 10% year-over-year, compared to steeper drops in previous quarters. In a call with investors, Uber CEO Dara Khosrowshahi said, “All early evidence we see makes it increasingly clear that it’s a question of when, not if, our mobility business will recover.” And the numbers bail him out.
Slowly but surely, the company is mounting a comeback. In Q1, Uber’s net loss was $2.9 billion and the pain continued in Q2, but now you see a reemergence, with Uber Eats leading the comeback. Gross bookings grew 135% YOY in the recent quarter, thanks to increased demand for food and grocery deliveries.
Meanwhile, Lyft is also riding high, recently reporting revenues of $499.7 million in the third quarter, a 48% dip from the $955.6 million in the year-ago period but a 47% improvement sequentially. Much like Uber, the company is trying its best to tough out the situation. However, unlike Uber, the company is focused solely on the U.S., and it doesn’t have a delivery business.
The Bottom Line
So, which company should you invest in? Considering the size and scale of Uber’s operations, I believe it’s the better option.
Although UBER stock trades at 7.30 times forward enterprise value-to-sales, its international profile and expansionary policies make it a more attractive proposition.
As I mentioned, there is nothing to be gained from playing Hertz stock.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.