Watching a legacy company hit the skids makes for one sorry sight. That’s especially true for Hertz (OTCMKTS:HTZGQ), which watched its fortunes sink as the novel coronavirus turned its rental car business into an auto salvage scrapheap. So went the fate of Hertz stock as well, delisted by the New York Stock Exchange in late October after 66 years.
But with 2020 drawing to a close, there is hope. The appearance of several Covid-19 vaccines will likely revitalize the travel industry and everything around it. The calculus is simple. If people take to the skies and open roads again, more will rent cars. And as more drive off from the Hertz parking lot, Hertz stock could inch ever so gradually in the right direction.
If so, that could make it quite the deal. Right now, Hertz stock is priced at $2 per share and up 180% since the NYSE delisting. I’m also thinking about billionaire Warren Buffett’s ongoing directive to invest in otherwise solid companies “when they’re on the operating table.” So is HTZGO a comeback candidate? Or too far gone for gas in the tank and a handy paper roadmap back to Easy Street?
Hertz Stock and the Big Borrowing Risk
When last I wrote about Hertz, I strongly advised against counting on any kind of return to form. In essence, Hertz stock was only worth your time if you used chump change normally splurged on takeout pizza and Pokemon cards. Maybe things are changing. But since jumping the gun is a Wall Street hallmark, many investors want to pronounce leisure, hospitality and travel back on solid ground. Since when? As I write this, not a single dose of FDA approved Covid-19 vaccine has been administered.
Meanwhile, Chapter 11 bankruptcy is a fact of life for Hertz right now. It’s likely investors in Hertz stock won’t even get hubcaps and cup holders once creditors split up the assets. In the face of this, the company continues to burn cash as though one of its attendants poured unleaded premium on it. Negative cash flow for October hit $25 million and in a September filing with the Securities and Exchange Commission, Hertz revealed total debt of $19 billion.
And yet Hertz plans to spend up to $5 billion (80% of that borrowed) to buy 229,000 new vehicles. Wha? Well, it kinda has to. You see, any effort to win customers back must embrace the marketing message that “Hey, we got rid of all those cars infested with Covid-19.” For all I know, the current vehicles were sterilized from here to Jupiter. But for a populace still reeling from pandemic paranoia, any connotation of a fresh start in a fresh four-wheeler is worth more than a lot full of Lamborghinis.
Shooting for That New Car Smell
At least one veteran market researcher believes Hertz has overestimated 2021 demand. He also wonders, having done the math, whether Hertz will restock its fleet with mostly economy vehicles. Dividing 229,000 in $5 billion, he came up with $21,834 per vehicle. (So did I.) If so, more than two dozen 2020 entries at or below that MSRP would qualify. These include the Toyota Yaris, Nissan Versa and Hyundai Elantra, all of which earn high marks from U.S. News & World Report.
If the Florida-based company sticks to such a thrifty plan and catches any surge of post-pandemic travel just right, Hertz stock could reap some bodacious benefits. What’s more, the company just sold its Donlan fleet management business to Athene Holding for an estimated $875 million. That move that will give Hertz more breathing room to work through bankruptcy.
Or not. Exiting Chapter 11 is never a given. Tough decisions loom concerning the company’s 10,000-plus locations worldwide. And new CEO Paul Stone was something of an emergency pick after the abrupt resignation of Kathryn Marinello in May. While she never issued a statement to this effect, let me quote one for you by way of my fertile imagination: “I saw the writing on the wall and ran like hell.”
Fasten Your Seat Belts for the Slog
Is there any reason for investors to once again embrace Hertz stock? Indeed, one share costs less than a gallon of gas. And the secondary value of Covid-19 vaccines to the rental car industry, even on a speculative level, represents a potential game changer. But for the time being I’d assume that the company’s bankruptcy slog will resemble a bunch of sweaty guys pushing a greasy Lincoln Continental out of a swamp ditch.
Here’s one way to look at it: Back in 2014, Hertz stock traded for $100 a share. Buying $200 worth today means that if the stock ever sees that level again, you’ll have $10,000 burning a hole in your glove compartment. But do know that analysts remain un-swayed. Only two have cared to weigh in of late and neither calls HTZGQ a buy.
What’s more, Hertz stock lost 90% of its value well before the pandemic, between mid-2014 and mid-2017. So any return to form may not be so simple as wiping down the steering wheel with hand sanitizer. The financial mechanics will have to drop in a whole new engine. And at this point, there’s no way to tell whether it will run just fine or simply run down.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.