Hertz Global Holdings Inc (HTZ)

[Enterprising Investor]

Hertz Shares Could Nearly Double (8/08/15)

By Leslie P. Norton

Hertz Global Holdings could offer investors a nice ride in coming years, as the company cuts costs, improves fleet management, and spins out or sells noncore assets. Some investors think the stock could be worth $30 on an asset-value, or sum-of-the-parts, basis, nearly double last week’s $16.33. Activist investor Carl Icahn owns 11.3% of the shares, and Jana Partners holds 9.1%, suggesting that there could be pressure on management to fully realize the company’s value.

Any positive moves would be a welcome reversal of fortune for the Naples, Fla.–based company (ticker: HTZ), which was forced to restate three years of earnings due to the discovery of accounting irregularities. It also has struggled to integrate the 2012 acquisition of rival Dollar Thrifty Automotive Group.

Hertz recently released restated numbers for 2011-13, along with 2014 audited results. The company earned $302 million, or 72 cents a share, in 2013, on $10.8 billion in revenue, but lost $82 million, or 18 cents a share, last year, due to a large number of auto-manufacturer recalls, weaker-than-expected airport rentals, and higher maintenance costs at Hertz Equipment Rental, or HERC. Analysts expect Hertz to earn 75 cents a share this year, and $1.24 in 2016 on $11 billion in revenue.

John Tague, a former United Airlines executive who became Hertz’s CEO in November, aims to restore order to a company that should have profited from the industry’s oligopoly structure; Hertz’s main competitors are Avis Budget Group (CAR) and privately held Enterprise Holdings. Tague told investors last month that “we see opportunity everywhere in the cost structure,” and shared plans to cut annual costs by $300 million by freezing the defined-benefit pension plan, closing unprofitable offices, improving fleet management, consolidating information-technology spending, and adopting a cloud-based IT platform. He’s also trying to boost rental rates, but industry pricing remains weak.

AT UNITED AIRLINES, Tague helped originate money-making ideas, such as baggage fees and the creation of premium seating in coach. Imposing penalties for canceled reservations is one possibility. Analysts think Tague’s moves could boost operating profit margins to 11.6% next year and 16.9% in 2017 from 9.6% this year. The CEO declined to be interviewed, citing the company’s quiet period before reporting second-quarter earnings this week.

Tague’s immediate challenge is to ensure that the Dollar Thrifty deal bears fruit. The companies’ IT systems will be integrated by year end. Hertz also has several new executives, including Tyler Best, its chief information officer, and Tom Kennedy, its chief financial officer. Both worked for Vanguard Car Rental, owner of the Alamo and National brands, when it was owned by Cerberus, the private-equity firm, from 2003 until 2007. They cut costs, restructured the company, and sold it to Enterprise for a price reportedly more than five times what Cerberus had paid. At Hertz, they’re trying to identify excess costs, improve operations, and modernize.

Hertz has a market value of $7.5 billion, and net debt, excluding debt securitized by its fleet, of $5.9 billion. But the company’s stock market value doesn’t reflect another $4 billion or so of noncore assets.

Michael Cahill of Crispin Capital thinks the rental-car unit alone could fetch 14 times 2017 estimated earnings of $1.50 a share, or $21 a share, 29% above the stock’s recent price.

THE NEW LEADERS of HERC—Larry Silber, a veteran of the construction-equipment industry, and Bruce Dressel, former CEO of competitor Sunbelt—plan to spin out that unit from Hertz by the end of next June. HERC lost ground in recent years to rivals such as United Rentals (URI; see page 18). Separated from Hertz, HERC could thrive and possibly become a takeover target for United or Sunbelt. United declined to comment; Sunbelt didn’t return Barron’s calls.

Hertz is negotiating to sell HERC’s French and Spanish businesses to Loxam, a European rental company. HERC earned $672 million last year before interest, taxes, depreciation, and amortization. Applying United’s multiple of 5.3 times Ebitda and subtracting debt would yield a value for HERC of $1.7 billion, or about $3.70 per Hertz share.

Hertz’s 16% stake in China Auto Rental (699.Hong Kong), China’s leading car-rental company, could be worth $748 million, or $1.63 a share. Hertz has promised to use any asset-sale proceeds to repurchase $1 billion of stock. The company’s net operating loss carryforwards, a tax benefit generated from 2008 losses and constant depreciation of its fleet, could be worth more than $1.8 billion, or $3.91 a share.

One potential challenge for Hertz is the rise of Uber, Lyft, and other ride-sharing companies, which are likely to steal airport customers. According to Northcoast Research, however, one-day airport rentals account for just 2% to 4% of rental-car companies’ transactions, and aren’t very profitable. And using an Uber car can be far more expensive than renting a vehicle. John Healy of Northcoast calls the Uber threat “more science fiction than reality.”

As Cahill sees it, Hertz was unloved because of accounting issues. With the trouble receding, Hertz and its shares look ready to drive back into the fast lane.

http://online.barrons.com/articles/hertz-shares-could-nearly-double-1439013142