Hertz Stock Price Defies Dour Outlook as Shorts Get Squeezed

Updated on
  • Sellers covering positions boost shares 173% from June low
  • Hurricane demand, rising used-car prices also provide a lift

When a company’s stock nearly triples in three months, it usually means management is selling a hot growth story. That doesn’t seem to be the case at Hertz Global Holdings Inc.

While a handful of positive developments have bolstered bulls -- from better prices at the rental counter to a jump in post-hurricane demand -- it’s short sellers who appear to be giving this surge its legs.

“Short covering definitely played a role in this run up,” said Barclays analyst Dan Levy, who has a price target of $9 for Hertz shares compared with Wednesday’s closing price of $23.71.

Though Hertz has Carl Icahn in its corner -- with the billionaire holding 35 percent of its stock and hand picking a management team to turn things around -- the car-rental company is also heavily shorted. More than a quarter of the shares are owned by sellers betting against Hertz, and when a bit of good news buoys prices higher, some buy stock to cover their positions. That drives shares higher in the short term but gives the stock more room to fall.

“There’s a lot of risk and many challenges here,” Levy said in an interview.

A spokeswoman for Hertz did not respond to a request for comment.

Summer Surge

After closing at $8.70 on June 21, the lowest since March 2009, Hertz shares spiked 173 percent through Wednesday’s close, sharply outpacing the Standard & Poor’s 500 Index’s 2.9 percent rise over the same period. The stock fell 1 percent to $23.47 at 10:18 a.m. Thursday in New York.

Some positive headlines helped support the summer’s gains, including Chief Executive Officer Kathryn Marinello announcing in August Hertz had completed a “transformation” of its fleet to meet changing customer needs. Investors also expect bonus revenue from drivers needing cars in the wake of Hurricanes Harvey and Irma -- with insurance policies funding the cost.

The storms will also drive up the prices Hertz gets when selling off its older fleet cars, which have been going at depressed values this year amid a weak used-car market. A million autos may have been lost or damaged in Harvey, giving used-vehicle prices a boost.

“People are underestimating how much the storm will help the rental companies,” said Macquarie Capital Inc. analyst Hamzah Mazari, who has a 12-month price target of $17, almost $7 a share less than Wednesday’s closing price. “You could see a couple of quarters of benefit.”

Short Sellers

The question, though, is if it’s enough to justify the current stock prices. Each time a positive headline gives the shares a boost, some short sellers get squeezed. Rather than see losses climb further, they buy stock at the higher rates and return it to the holder from whom they borrowed, fueling the cycle of rising share prices.

As Hertz rose this summer, short interest as a percentage of its float climbed from about 30 percent at the start of June to a peak of 55 percent near the end of July, data from IHS Markit show. As the stock inched toward $20 and then passed it, some sellers ran for cover, but the short interest is still about 26 percent of float. Rival Avis Budget Group Inc., also heavily shorted, has about 18 percent short interest. That compares to 2.8 percent on average for S&P 500 companies, data show.

Hertz’s 23 percent jump the day after the company announced second quarter earnings is a prime example of short interest at play. The company’s loss of 63 cents a share was worse than expected, but the share price firmed after Hertz announced it had successfully slimmed its bloated fleet of fast-depreciating cars. When the stock started going up, shorts who’d expected bad news to sink prices had to cover positions and the shares got more of a bump than would normally be warranted, Barclays’ Levy said.

Hedge fund managers and traders now know that they have short sellers in a squeeze and are trading accordingly. “Rental company stocks have been favorites of hedge funds,” Levy said. “They trade off a flow of data points. They feed off of each other.”

Earnings Justification

The biggest challenge for Hertz in the near term will be putting up enough in earnings to justify the soaring stock price. Hertz is expected to make about $267.5 million in earnings before interest, taxes, depreciation and amortization this year, according to the average analyst estimate in a Bloomberg survey. It takes more than $700 million in Ebitda to justify a stock price of $20 a share, Levy said.

Only two analysts rating the stock have a buy recommendation, according to data compiled by Bloomberg. The average 12-month price target is $17.38.

Morgan Stanley analyst Adam Jonas has a $14 price target and figures Hertz will bring in $682 million in Ebitda in 2018, nearly double the $344 million he’s predicting for this year, partially fueled by a $170 million profit windfall related to the hurricanes. That’s a nice recovery, but it still indicates that the stock is overvalued, he wrote in a report on Sept. 14, when the stock was at $21 a share.

“Destructive weather events present a material short-term increase to pricing but we believe this is more than in the share price,” Jonas said. While Hertz management has tried to stabilize liquidity, “structural issues with the car rental model remain.”

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