Hertz shares get jammed into reverse

The future for the car rental giant is murky.

By Jonathan Berr Sep 27, 2013 9:53AM
When Hertz Global Holdings (HTZ)  closed on its $2.3 billion acquisition of rival Dollar Thrifty last year, CEO Mark P. Frissora said in a press release: "In the 94-year history of Hertz, our employees and business partners have never been this excited."

 

What a difference a year makes. Shares of the Park Ridge, N.J., company tanked 16% to close at $21.63 Thursday after the second-largest car-rental company slashed its profit outlook for the year. Earnings will be between $1.68 and $1.78 per share on revenue of $10.8 billion to $10.9 billion, versus an earlier projection of $1.78 to $1.88 per share on revenue of $10.85 billion to $10.95 billion.

 

This is a surprise for several reasons.

 

First, Hertz's latest quarterly earnings weren't bad. Profit rose 31%, fueled by double-digit gains in both its car and equipment-rental businesses. The results met Wall Street expectations. Revenue per transaction-day rose 1.2%. Moreover, rival Avis Budget also reported an in-line quarter, even though acquisition costs resulted in an overall loss.

 

The overall economic environment for Hertz seems good as well. Global business travel is expected to rise 4.2% to $273.3 billion, according to the Global Business Travel Association. Leisure travel also is on the upswing as vacationers open their wallets to visit attractions such as Walt Disney World.

 

Customers waiting in line at a Hertz rental car counter at San Jose International Airport in San Jose, Calif. © Paul Sakuma/APWhat went wrong for Hertz?

 

According to Frissora, the U.S. airport business was a laggard, hurt by weak volumes, which in turn led to lower utilization rates and made it more difficult to sell Hertz's inventory of used cars. He says this is a temporary situation that will be rectified in the coming quarters as price increases take hold. Indeed, he's predicting record earnings for the year, albeit lower than earlier forecasts.

 

Hertz will certainly benefit from its recent decision to rent Tesla's super-hot electric Model S cars at two California locations. But whether Frissora's profit prediction will prove prescient is tough to say. Hertz is offering loads of rental deals on its website that could wind up pressuring profit margins. People are also increasingly using sites like Priceline to book travel services, including car rentals, to get the best deals.

 

The average 52-week price target on the stock is $27.71, more than 27% higher than where it currently trades. And the stock has been a speed demon this year, up around 60% just recently. But given the uncertainties around Hertz now, it would seem prudent for investors to steer clear of the shares, at least for a while.

 

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr or at Berr's World.

 

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