Bankrupt Hertz Global Holdings (OTC:HTZGQ) is a very enticing stock right now. Those looking to pick up some Hertz stock as a rebound play may be looking to score a quick win.
Indeed, Hertz could bounce back nicely in a post-pandemic environment. A quick double-up or triple-up of one’s investment can bring a lot of deep value investors to the table.
Hertz stock has actually rallied more than 400% from its 52-week low. That’s a pretty good return for deep value investors willing to scrape the bottom of the barrel.
However, I think this is a dog with too many fleas right now. I’m going to highlight why I’m steering clear of this restructuring play right now.
Hertz Stock Operating Results Worse than Expected
Hertz reported some pretty underwhelming numbers in its most recent report. Revenues declined by 56% and the company reported a net loss of $222 million. Various debt restructuring moves have taken place in accordance with bankruptcy laws. Among these, the company took out a debtor-in possession (DIP) loan of $1.7 billion and a fleet financing commitment of $4 billion which was pending court approval.
These are prior quarter results, as Hertz is not expected to report earnings until later this month. Indeed, I think the upcoming earnings report will cause some volatility with Hertz stock. Whether this is on the upside or downside really depends on how strong the numbers are. If investors are willing to look past the pandemic toward the long-term, Hertz stock could catch a bid.
However, if it looks like this stock has way too much hair on it, investors may cut their losses and move on.
Chapter 11 Bankruptcy Issues
Under bankruptcy law, a company has to show a realistic business plan showing a reasonable likelihood of survival to exit Chapter 11 bankruptcy. Such a plan would need to be approved by the court and would need to show the company is on solid footing. If further liquidation or restructuring is needed, a plan may not be confirmed.
Hertz is currently still liquidating its fleet to right-size for existing demand. While Hertz has acknowledged the company has made progress toward emerging from Chapter 11 bankruptcy, and the company’s debt load has been reduced substantially, more work is likely needed for Hertz to be in a position to present a plan that is accepted by the court.
Accordingly, it may take a while for this company to be re-listed once again and taken off of the OTC exchange. Given the losses and amount of restructuring that’s happened thus far with Hertz, I have no idea how long this stock will remain in bankruptcy protection.
Any sort of indication that the restructuring plan isn’t on the right track could be detrimental to this stock. Again, I think there’s going to be some tremendous volatility in this stock in the coming weeks around earnings.
Won’t Things Get Better Post-Pandemic?
Broadly speaking, yes. Things can’t get much worse for rental car volumes.
This is a stock that was trading around the $15 for the better part of the past five years. There’s real potential this stock could start to climb out of this mess if travel restrictions are loosened or removed sooner than expected. Vaccine rollouts around the world are being accelerated. Importantly, pent-up demand for discretionary travel will certainly drive a spike at some point.
Indeed, these are all positive catalysts. The key here is the timing of when such catalysts materialize. For now, I think more downside exists with Hertz than is apparent on the surface. Until the company emerges from its Chapter 11 bankruptcy, I’ll be on the sidelines.
Disclosure: On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.