Hertz Global Holdings Inc (HTZ)

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A Deep Value Opportunity Away From The Herd: Hertz Global Warrants https://seekingalpha.com/article/4453036-a-deep-value-opportunity-away-from-the-herd-hertz-global-warrants

Sep. 01, 2021 1:26 PM ET Hertz Global Holdings, Inc. (HTZZ), HTZZW

Summary
-Hertz Global Holdings is a newly re-structured company post-bankruptcy.

-Hertz has removed $5 billion in debt and streamlined operations.
The company's Q2 2021 results were above expectation.

-Hertz warrant options trade at a significant discount to NAV and provide 22% margin of safety.

-This idea was discussed in more depth with members of my private investing community, Away From The Herd

Editor's note: This article was amended on 9/1/2021 to reflect a quantitative correction in the 'Warrants' section.

By, David Huston and Nick Gomez

Value investors would be forgiven for thinking that there is no point in investing, or finding, deep value plays in today’s market. Just holding the S&P 500 index – with its huge weighting to large cap growth – has returned 18.4% in 2020 and 22% YTD. That being said: if you know where to look, there is value in this market. One such opportunity arises from a mispricing inherent to Hertz Global Holdings 30-year warrants.

Hertz Global Holdings
Hertz Global Holdings (OTCPK:HTZZ) is the parent company of Hertz, Dollar and Thrifty vehicle rental brands that operate worldwide. It is one of the most recognizable brands globally and the business suffered through the COVID-19 induced lockdowns last year.

This resulted in the century-old Hertz rental company entering into bankruptcy proceedings and re-structuring its debt. Hertz sold off nearly 180,000 vehicles and ended up in the hands of two investment firms - Knighthead Capital Management LLC and Certares Opportunities LLC, with shares also traded publicly on the OTC market.

This sounds bad, but let’s look at the numbers. Hertz had a fantastic re-structure. According to Judge Mary Walrath the outcome from the bankruptcy was a "fantastic result" that "surpasses any result that I've seen in any Chapter 11 case that I've faced in my 20-plus years”. Executives managed to eliminate $5 billion worth of debt, gain a $2.8 billion credit facility and a $7 billion asset-backed financing capability. They sold their Donlen fleet leasing business for $891 million and tightened up operational efficiency. The money that they generated from selling the 180k vehicles was more than management expected and that capital goes straight back into the business.

Performance & Ownership Structure
The business has a total of 471 million shares and most of these shares are owned by the investment firms who have a significant stake in the business, and inside owners. That leaves a float of $275 million shares which are 41.7% held by institutions.

The shares have had a torrid time in 2021 so far. Hertz opened this year at $22 and was mooted by Barron’s to be in pole position to move forward from here, back in July 2021. Since then, shares have meandered as low as $15 and currently trade at $16.80. Barrons has stuck with their thesis and continues to re-iterate that the warrants for Hertz Global are excellent value. Let’s get into why that is now the case; it is fair to say that, after the tip, hedge funds and banks have probably had their fill betting against Hertz.

In terms of Hertz operational and business performance, they had a fantastic Q2 that doesn’t appear to be fully priced into the stock. Revenue was up 62% to $1.9bn, and they had a net loss of $168mn which included $633mn in reorganization expenses. Liquidity rose to $3bn from $1.1bn at quarter end.

What’s more, the company took a gamble – selling their average vehicle base from 517,973 vehicles down to 350,122. The improvement in their finances is partially due to realizing very high selling prices for their fleet of used cars, as they benefited from a buoyant used car market. Now that Hertz Global has 78% vehicle utilization, they can re-build their fleet and start to buy-back vehicles that go straight into service.

Their core KPI of total revenue per transaction day (representing vehicle pricing in the market) rose 53% in the Americas and 32% in international markets. They are within earshot of their 2019 performance levels and according to the CEO on the Q2 call demand remains strong.

Warrants
The CEO added one more cherry to the pie when he announced that he would like to “re-IPO” the business and bring the shares back to established markets on the US exchanges (NYSE or Nasdaq). Given that he has stated this is a core focus for the upcoming year, expect to hear more news about the plans and a potential flotation in 2022.

This brings us to the investment opportunity. Hertz Global shares currently trade at $16.80 and have shown some upward momentum since they bottomed at $15.

We see a floor under prices at $15 and signs of upward momentum since 19th August as it looks to challenge the $18.75 level last seen in July.

Hertz Global has 30-year warrants that trade under the ticker symbol HTZZW. They are fully convertible (1:1) into stock and there’s a formula for their exercise price in the prospectus that accompanied the re-structure of the business.

The exercise price is equal to a fixed market cap estimate of 6,500,000,000 divided by the number of outstanding shares – currently 472,000,000. That gives you an exercise price of $13.77, even though the common stock trades at $16.80. This is like paying $8 for a 30-year call option that is $3 in-the-money, which allows you to follow the business and wait for the two catalysts to unfold--continued operational performance, and a re-IPO in the near future.

Valuation
We uncovered this opportunity last month at below $7 but we continue to think that there is significant upside ahead.

Consider this: HTZZ currently trades for 1.4x sales and 2x book with a PE of 16.8. Compare this to AVIS – one of their major competitors – which trades on 35x earnings and a price/book of 69x and price/sales of 1. Avis has $17.2bn in debt against $10bn for Hertz even though they have similar market caps.

The potential for having stable insider-owned shares sold into the market through a re-IPO, and the positive momentum that they have made in the business, make Hertz shares a buy and their warrants a significantly undervalued opportunity for market participants.