This week, large institutional investors gave Hertz Holdings (HTZ: Charts, News, Offers), the car and equipment rental company, an apparent vote of no confidence by dumping shares of the world’s largest vehicle and equipment rental chain. Its two largest shareholders, Bank of America (BAC: Charts, News, Offers), Merrill Lynch and two private equity funds – Clayton Dubilier & Rice and Carlyle Group, will sell 50 million of its 210 million shares, which reduces their combined stake from 51% to 39%. Hertz is a familiar sight to any traveler, as its rental vehicles (82% of revenue) are available in 8,500 locations across 146 countries – in North America, Europe, Latin America, Australia, Asia and New Zealand. The company also licenses its brand to private rental companies in Africa and the Middle East. Hertz also rents out equipment (18% of revenue), through its HERC subsidiary, in 320 of its branches in the United States, Canada, France, Spain, Italy and China. HERC equipment includes industrial vehicles, material handling equipment, aerial and electrical devices, air compressors, pumps and generators. Their primary equipment rental customers are primarily non-residential construction companies and contractors. What prompted this sudden sale of stock, and should investors be worried?
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The three investment giants originally purchased Hertz from Ford Motor Company (F: Charts, News, Offers) in 2005 for $15 billion. Hertz was restructured and was offered publicly through its November 2006 IPO. The IPO, its secondary sales and a $1 billion dividend helped the three firms recoup $2.3 billion by 2007. Hertz has been expanding, acquiring rival Advantage Rent A Car in 2008, 24/7 Studio Equipment and Australian car-sharing service Flexicar in 2010. The company’s sales have suffered in January and February, due to North American winter storms and price increases. The company has attempted to offset these losses by selling their retired vehicles on the used car market, and Japanese brands have attracted high resale prices. This was partly due to the decreased production capacity of overseas plants due to the March 11 earthquake and tsunami. Japanese vehicles comprise 40% of the company’s international fleet. The company expects its car rental revenue to increase from 5 to 6 percent next quarter, with a rise of 11 to 12% in equipment rental revenue. The company does not expect to hike prices further in the first quarter of 2011, as competition in the car rental market from rivals Alamo, Avis (CAR: Charts, News, Offers) and Budget is tight, but may raise prices in the second quarter, depending on first quarter earnings. For the first quarter, Hertz forecasts an adjusted loss of $22.2 million, an improvement over the $49.3 million loss it incurred in the first quarter of 2010.
The sale of Hertz stock could have been caused by several macroeconomic factors. First and foremost is the future of air travel, which gives the company 70% of its car rental business. Due to rising oil prices, airline tickets have become increasingly expensive. If air travel volume begins to decline, then Hertz will be directly effected. In addition, cash strapped consumers will likely seek package deals, such as ones from Orbitz (OWW: Charts, News, Offers), which combine airfare, car rental and hotels for substantially cheaper prices. These package deals often pair their travel offerings with the least expensive car rental service, which is usually Alamo or Budget. Even if Hertz is selected, the company stands to earn much less on these packaged rentals. More price conscious travelers may also opt out of the company’s collision coverage and insurance plans, from which the company garners a large amount of additional revenue. Rising oil prices will also limit the company’s ability to increase costs and pass the costs onto the customer, as customers will be reluctant to pay high rental fees in addition to high fuel costs.
As mentioned earlier, 40% of the company’s vehicles are Japanese; the remaining 60% are domestic, mainly from General Motors (GM: Charts, News, Offers) and Ford. These used vehicles, when retired, are not sold on the open market, rather they are sold back to the manufacturer for an above market price. Hertz’s current relationship with these manufacturers may be impaired if the current trend of high oil prices continues and affects their ability to repurchase used vehicles at a premium, thus chipping away at the company’s revenue. Shares of Hertz current trade with a forward P/E of 12.92 and are currently near the high end of its 52-week range of $8.36 to $16.63.
Other News About HTZ
BofA, equity firms sell 50 million shares of Hertz
Institutional investors dump Hertz.
Hertz falls after 3 shareholders sell a quarter of their stake
Are there storm clouds ahead for the car rental giant?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
