Photographer: Luke Sharrett/Bloomberg

Hertz Slumps as Investors Kept in Dark on Recovery-Plan Cost

  • Icahn-backed rental company hit by tumbling used-car prices
  • New chief Marinello has been working to upgrade the fleet

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 try 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 vehicles, Marinello started selling off Hertz’s compact cars and family sedans, which are out of favor with U.S. drivers, and take a hit. She also stocked up on new models, a move that played a big part in Hertz’s $1.61 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 rental 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 and won’t forecast for investors how much it may lose in the process, putting Wall Street on edge.

“Very broadly, what’s the bottom to all this pain?” Barclays analyst Brian Johnson wrote in a research note. “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.”

Bottom Near?

The stock fell 14 percent Tuesday to $12.80, the lowest closing price since March 2009, after earlier tumbling as much as 21 percent. It was already down about 31 percent this year as of Monday’s settlement, ahead of its earnings release.

“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 full-size vehicles that are what our customers want to rent.”

The cost of refreshing its fleet is just one issue weighing Hertz down. Rental pricing per day fell 2.8 percent in the U.S. and 3.9 percent in its international business thanks to overheated competition.

Hertz’s long-term debt is now $14 billion, almost $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. Moody’s Investors Service downgraded Hertz’s corporate family rating one level to B2.

As challenges mount, the cost of insuring Hertz debt from a default over the next five years jumped to about 914 basis points on Monday, the highest since May 2009, according to data provider CMA. That’s twice as high as comparable credit-default swaps, or CDS, for competitor Avis Budget Group Inc.

Used-Car Glut

Hertz isn’t alone in its pain, though its faster-than-normal fleet upgrading is making it particularly sensitive to challenges in the market. U.S. 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 percent in the first quarter to $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 percent 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.

New Chief

Marinello, a former director at General Motors Co., took over when John Tague, a former United Airlines executive, retired after less than three years in charge. Mark Frissora, the CEO of Caesars Entertainment Corp., left Hertz in 2014 in the wake of accounting problems at the company and shortly after billionaire Icahn took a large stake.

Icahn, the company’s biggest shareholder at 35 percent, has a choice to either buy more stock at depressed prices or liquidate at a loss.

“Given the recent selling pressure, we’d expect him to become more involved,” Johnson wrote. “That said, his strategy very well may be to only raise his stake at a lower price.”

Hertz didn’t give an earnings forecast, which might help it move faster on restructuring since it can endure bigger losses, Hamzah Mazari, senior analyst with Macquarie Capital Inc., said in a phone interview Monday after results were released.

“They haven’t given guidance so they have a free pass,” Mazari said. “They are rightsizing the fleet even though they are taking a big hit. If they do it now, they should get better pricing on the cars they rent later.”

— With assistance by James Crombie

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