Hertz plunges as investors question how long company recovery will take
WHEN Kathryn Marinello took the reins at Hertz Global Holdings Inc. in January, she inherited a company that was bleeding red ink and had a bloated rental fleet. To turn it around, she decided to overhaul its supply of cars even if it meant crushing earnings and sending shares plunging.
She achieved both. Despite a weak market for used cars, Marinello started selling off Hertz’s compact cars and family sedans, which are out of favor with US drivers, and take a hit. She also stocked up on new models, a move that played a big part in Hertz’s US$ 1.61 ( RM7.2) per share adjusted loss and pushed the share price into a freefall.
The strategy is a gamble that Hertz – whose largest shareholder is billionaire Carl Icahn – can get better prices with newer, nicer sport utility vehicles and that eventually, the company will get through its glut of unloved sedans and start to show results. The bet looks even riskier since Hertz is taking on more debt to do it.
“We are focused on getting the fleet right,” Marinello said on a call with analysts Tuesday after reporting a loss almost double what analysts had estimated. “We are bringing in higher quality, prestige fullsize vehicles that are what our customers want to rent.”
The stock tumbled as much as 21 per cent in New York to the lowest since March 2009. It was already down about 31 per cent this year as of Monday’s settlement, ahead of its earnings release.
The fleet shift might be necessary, but it still leaves investors wondering where the bottom is for Hertz losses and the stock, Barclays analyst Brian Johnson wrote in a research note.
“Very broadly, what’s the bottom to all this pain?” Johnson wrote. “Investors are operating under a vacuum of information, and the stock is uninvestable until there is some explanation of the range of earnings outcomes and the state of the business.”
And the value of its cars is just one issue weighing Hertz down. Rental pricing per day fell 2.8 per cent in the US and 3.9 per cent in its international business thanks to overheated competition.
Hertz’s long-term debt is now US$ 14 billion, almost US$ 500 million more than at the end of 2016.
Johnson wrote that some investors may shy away from a company with so much debt and said Hertz may have to talk to its banks to stay within its debt covenants.
Hertz isn’t alone in its pain, though its faster-than-normal fleet upgrading is making it particularly sensitive to challenges in the market.
US used- car values have been tumbling as a glut of vehicles returns to the market after their leases end, driving down the National Automobile Dealers Association Used Car Guide’s price index in March to the lowest since September 2010.
Hertz said net vehicle depreciation per car rose 15 per cent in the first quarter to US$ 348 per car per month.
That’s the fastest decline in a quarter since 2010 and mirrors the annual depreciation rate from 2008, during the financial crisis, Johnson said.
Even as its cars were losing value at a faster rate, Hertz sold 21 per cent more vehicles than it did a year ago, which added to losses.
Marinello told analysts on the earnings call that there could be more pain ahead as it works through its upgrade strategy.
“Executing the long-term strategy requires significant level of investment and 2017 will take the brunt of earnings impact,” she said. — WPBloomberg