Here we go again with Hertz (OTCMKTS:HTZGQ). Traders have made Hertz stock their plaything, and not for the first time.
Indeed, Hertz declared bankruptcy back in late May. Stunningly, Hertz stock would soar to over $5 from under $1.
That rally faded, but the stock jumped again in October, clearing $2 before again dropping below $1. Now we’ve seen almost the exact same pattern play out, with HTZGQ touching $2.50 last week before retreating.
In other words, each of the past rallies in Hertz stock has faded. And that history isn’t just limited to Hertz stock. Traders in 2020 have gone nuts over other bankrupt companies like Chesapeake Energy (OTCMKTS:CHKAQ) and Whiting Petroleum (NYSE:WLL). Only those who properly timed their exits after riding the wave managed to turn a profit; anyone who believed in the long-term story for either of those stocks generally took a bath. (Whiting has looked intriguing after exiting bankruptcy, but traders who bought the pre-bankruptcy case took substantial losses.)
Hertz isn’t likely to be any different from other bankrupt stocks, or HTZGQ itself in the past. There simply isn’t any real equity value here. Traders are having their fun, but investors need to look elsewhere.
Good News for Hertz Stock?
It’s hard to tell exactly what has driven the more recent rally in HTZGQ. Inexperienced investors on the Robinhood platform tend to get blamed for all of the market’s supposed ills, and it’s possible those types of traders are behind the rally of the last few weeks. But there are two other possible explanations.
First, travel stocks have rallied as investors (and all of us) become increasingly hopeful about a Covid-19 vaccine. Hertz rival Avis Budget Group (NASDAQ:CAR) has seen its stock gain more than 50% since early November. Many airlines, as well as cruise stocks like Carnival (NYSE:CCL,NYSE:CUK), have done even better. Some investors might see the potential “return to normalcy” as enough to get Hertz back on its feet.
Second, Hertz seems to have delivered some good news of late. Hertz cited improving trends in its third quarter report on Nov. 9. A few days before, it announced $4 billion in additional fleet financing. The sale of its fleet management business, Donlen, for $875 million followed toward the end of the month.
It’s possible that the sum of these announcements have led investors to believe that Hertz is making progress, and therefore Hertz stock is a buy. That thesis is undercut somewhat by the fact that HTZGQ hasn’t necessarily moved directly in relation to news. Still, at least some buyers of Hertz stock presumably believe there’s some value to be had.
Where’s the Equity Value?
The problem remains: the odds of there being any equity value at all remains exceedingly slim.
None of the recent announcements change that problem. The $4 billion in fleet financing is part of the bankruptcy process. It doesn’t help Hertz get out of bankruptcy. The same was true of the $1.6 billion in debtor-in-possession financing that spiked HTZGQ back in October.
Q3 numbers were better — but still pretty ugly. Revenue declined by more than half. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was still negative in the quarter.
All that aside, the core problem holds. Hertz still has a mountain of debt. Total debt at the end of the quarter, including so-called “debt subject to compromise,” totaled $13 billion.
The $4.4 billion in debt subject to compromise itself highlights the problem. That debt that Hertz itself believes will be allowed as claims in the Chapter 11 case. Those bondholders are making claims because they’re not expecting to get paid back.
Indeed, Hertz bonds still are trading as low as 50 cents on the dollar. (They’ve actually been quite good investments off March lows.) And if bondholders don’t get paid in full, shareholders most likely get nothing at all.
No Way Out
Again, it’s not clear exactly why Hertz stock is rallying again. What is clear is that the rally is going to reverse. There has been no evidence that Hertz has a way out of bankruptcy. There’s been no evidence that shareholders will get anything during the Chapter 11 restructuring.
Indeed, Hertz itself has warned shareholders away. In June, the company tried the unprecedented step of selling stock while in bankruptcy. Before the Securities and Exchange Commission stepped in, the company filed a prospectus with the SEC. In that prospectus, Hertz wrote:
Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full…
Nothing has changed in the last six months. Or, at least, not enough has changed. Hertz stock still is almost certain to be a zero.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
