Is Hertz a Good Stock to Buy?

Hertz (NYSE:HTZ) reported its second quarter 2012 results earlier this week. The company set a quarterly record for rental-days, a key operating metric, and excluding various items it earned 35 cents per share compared to the consensus estimate of 32 cents. Actual EPS of 21 cents per share was still up a substantial amount from the 12 cents per share the company had earned in the same quarter of the previous year, and revenue rose 7% compared to the second quarter of 2011. Hertz primarily offers rental car services, most notably at airports, and also rents industrial equipment such as earth movers. The news comes as speculation swirls as to whether Hertz will finally put a solid offer on the table in its two-year-long pursuit of Dollar Thrifty Automotive (NYSE:DTG), an acquisition that would enable the resulting company to compete with privately owned Enterprise for the top spot in market share in the rental car industry. We reported on the Hertz/Dollar Thrifty M&A deal in early July. On Hertz’s earnings call, management would only say that they “continue to believe that a merger is in the best interest of both companies.”

YORK CAPITAL MANAGEMENT

Hertz has been hit by the market as it considers the merger. Its stock is down 19% over the last year, and 29% over the last three months. Its trailing P/E multiple is 20 but sell-side analysts expect it, even as a standalone company, to substantially increase its earnings in the coming quarters: its forward multiple is only 7. Possibly because of its business’s exposure to travel, and possibly because the company is highly leveraged (market cap of $4.8 billion, enterprise value of $15.6 billion), it has a very high beta of 2.7 suggesting that statistically it is highly sensitive to the broader market. Investors who believe that weak growth is on the horizon for the U.S. should therefore opt out of buying it completely, and its valuation seems to depend on growth or the benefits of a merger.

There was some insider selling at Hertz earlier this year. The largest of these took place in May, when a Senior Vice President sold 30,000 shares; however, the transaction price of $15/share was well above Tuesday’s closing price of $11.26. We think that the insider made a good decision to sell but it probably doesn’t indicate any more bearishness on the stock than what we have already seen.

At the end of March there were two large hedge fund positions of over $200 million. York Capital Management, run by billionaire James Dinan, owned 19.6 million shares. According to York’s 13F filing, Hertz was the fund’s fourth largest position with the largest being Dollar Thrifty Automotive, suggesting that York was investing in Hertz with an eye to increased efficiencies from the proposed merger. The fund had increased its holdings of Hertz by over 60% in the first three months of the year (read more about York Capital Management’s portfolio). Billionaire Glenn Dubin’s Highbridge Capital Management owned 15 million shares at the end of the first quarter after having increased its position in the summer of 2011 (see other stock picks from Highbridge).

Hertz has a number of competitors which are publicly traded and make for good peers. We’ve already mentioned its potential acquisition Dollar Thrifty Automotive, which carries a trailing P/E of 12.6 (and this value is likely inflated by speculative buyers hoping that Hertz’s offer will provide an overnight double-digit return on the stock price). Avis Budget Group (NASDAQ:CAR) is another good comparable from an industry and competitive standpoint, but it is unprofitable on a trailing basis. Its sky-high beta of 3.4- Avis Budget has only slightly less debt than Hertz and only a third the market cap, and is in the same travel-dependent business- is risky, though sell-side analysts believe that it will offer a great return as their 5-year earnings estimates imply a PEG ratio of 0.24 (this figure is 0.72 for Hertz). It still sounds too risky for us to take a position on Avis Budget. United Rentals (NYSE:URI) primarily rents industrial equipment, which as mentioned is another segment served by Hertz. URI has a fairly high trailing P/E of 38 and a forward P/E of 6, suggesting that Wall Street analysts are highly bullish on the entire rental industry. We would avoid United Rentals as well and advise investors to watch for an offer for Dollar Thrifty. The specifics of any deal are too uncertain for us to predict and given the knowledge that a deal of some kind is in the works these details are a major risk to both Hertz’s and Dollar Thrifty’s stock prices.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!