Why Hedge Funds Are Betting on Hertz Global Holdings, Inc (HTZ)?

Hertz Global Holdings, Inc (NYSE:HTZ) is one of the largest general use vehicle rental businesses in the world. In this article, we will take a closer look at the aggregate hedge fund sentiment towards the stock and will assess why smart money investors are bullish on the company.

Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 740 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

Hertz Global Holdings, Inc (NYSE:HTZ) operates the Hertz, Dollar, and Thrifty rental brands in approximately 10,000 corporate and franchise locations. Hedge funds like Hertz because the rental car sector has consolidated substantially since 1999, with the number of major auto rental businesses shrinking from six to three. Those three businesses, Hertz, Avis, and Enterprise, control 90% of the industry and theoretically have more room to improve pricing and margins. Hedge funds also like Hertz for its cheap valuation.

On June 30, Hertz spun off its equipment rental company, Herc Holdings Inc (NYSE:HRI), and received proceeds of around $2 billion from the transaction. Management will use some of the cash raised to pay down debt, reinvest in its rental business, and to purchase as much as $395 million of its shares back.

Around the same time, Hertz struck a deal with ride sharing apps Uber and Lyft, allowing the apps’ drivers to rent mid-sized cars for around $180 a week and compact cars for slightly less. In contrast to investor worry that Uber and Lyft will cannabalize Hertz’s bottom-line, the deal shows how Hertz can co-exist with the two and use the apps to complement its own growth.

For its second quarter, Hertz reported adjusted earnings of $0.41 per share, down from $0.80 per share in the prior year period. Revenue was $2.27 billion, off 2.2% year-over-year. Adjusted EPS was hurt by $20 million in unanticipated net charges, which lowered the bottom-line number by $0.15 per share, and by a 6% decline in total revenue per transaction day, which shrank the top-line. For the full year and excluding the equipment rental business, Hertz sees adjusted EBITDA of $850 million to $950 million, free cash flow of $500 million to $600 million and adjusted EPS of $2.75 to $3.50.

Although Hertz’s second quarter numbers were disappointing, there were some green shoots in the report. Hertz’s U.S. vehicle utilization rose 700 basis points versus that of the prior year due to stronger demand. Management remains focused on cutting costs, targeting $350 million in cost savings for 2016, and the company is confident it will achieve full-year free cash flow of $500-$600 million, up from the previous $400-$500 million due to lower spending. As the company pays down its debt and achieves its net leverage target of 3.5x by the end of the year, it will have more flexibility to buy back shares or to make acquisitions with its free cash flow for the coming years. Given that Hertz’s current free cash flow yield of over 13.7%, the company’s stock has substantial upside if the market gives more credit to its valuation due to those buybacks.

Overall, of the around 750 funds we track, 38 funds owned $1.97 billion worth of Hertz Global Holdings, Inc (NYSE:HTZ)’s stock, which accounted for 42.00% of the float on June 30, versus 47 funds and $1.79 billion respectively a quarter earlier. In terms of individual fund ownership, Larry Robbins‘ Glenview Capital owned around 11 million shares at the end of June, which amassed 2.5% of its equity portfolio. Jonathon Jacobson‘s Highfields Capital Management reported a stake of over 6.5 million shares in its latest 13F filing.

Disclosure: None