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The Bankruptcy Court Has Spoken on Hertz, Now Let the Buyers Beware

I assumed Hertz (OTCMKTS:HTZGQ) had been put out of its misery a long time ago. I called the stock’s story a fantasy  in late summer when Hertz stock was trading for pennies. And there was no reason to believe it would emerge from bankruptcy as anything other than what it is. And that’s a stock that will have nothing left for shareholders.

Source: Shutterstock

Yet as I write this, Hertz stock continues to defy the expectations of investors who have left the stock for dead. A bankruptcy court has approved the company’s plan. But the result of that plan will leave nothing for shareholders.

That’s because, as Muslim Farooque points out, any assets maintained by Hertz in a post-bankruptcy world will be owned by its creditors. And that means there is no reason to own Hertz stock. Zip. Zero. Which also may be the company’s stock price in the near future.

The Virus Oversimplifies the Tragedy of Hertz Stock

There are those that will continue to hold unto Hertz stock as a virus play. These traders (or are they gamblers) may argue that rental car activity will increase once there’s a vaccine. They may point to the fact that the stock was trading at nearly $20 per share before the world shut down.

But that is an oversimplification. The reality is that Hertz was a troubled company for several years before the novel coronavirus. And that’s because the real virus for the company is a sclerotic business model.

As ride-hailing services have become more popular, the rental car agency was put under siege. For the first time in their existence, rental car companies were not just competing with other rental car companies. Companies like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) represented an existential threat.

And companies like Hertz and Avis (NASDAQ:CAR) couldn’t simply cut their prices to compete for customers, not if they wanted to turn any sort of profit.

The Generations They Need Don’t Like Driving

But there’s a more fundamental reason. As it turns out, people really don’t like to drive that much, particularly the millennial and Generation Z consumers who are dominating the business travel scene.

In a 2018 study by Arity, a Chicago-based transportation technology and data company, cited that over 50% of adults between the ages of 22 and 37 said a car was not worth the money due to costs like maintenance. And, they would prefer to do other things other than driving (we’ll presume being on their phone is one of them).

So even if we presume that business travel returns to some level of normalcy in 2021, there’s no reason to believe that will translate to better fortunes for rental car companies.

What makes things even more dire for the rental car business is that many millenials are part of the urban flight. One recent study found that New York City recorded nearly 300,000 change-of-address forms. This calculated to approximately one million people who are fleeing New York City. That’s just one example. And as they flee the urban jungle, these consumers are becoming downright suburbanites, including showing increased demand for used cars.

Will Hertz Be a Takeover Target?

If you’re looking for any silver lining for Hertz, I’ll point you to my InvestorPlace colleague David Moadel. Moadel recently wrote an article suggesting Hertz stock could reward investors if it was the object of a takeover. That’s an interesting thought, and it would certainly give traders a reason to dabble with the stock. But the question is whether this is a realistic expectation, or just the longest of long shots.

I’d argue it’s the latter and that’s why you simply need to avoid Hertz stock. Even the strongest pent-up demand is unlikely to be anything more than a bandage on a bullet hole. Even when the stock emerges from bankruptcy it will likely be selling under a different ticker. Any shares you hold in the current version of the stock will be worthless.

It’s a race to the exit, and this is a race you need to win.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/hertz-stock-represents-fools-gamble/.

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