Morgan Stanley’s Adam Jonas and team fret that Hertz’s problems go beyond its well-known accounting problems:
The company has had a lot on its plate in recent years: expanding into the used car business, implementing new technology, and acquiring and integrating DTG. While there have clearly been challenges, to which the company is openly admitting, we are confident that many of the integration issues are short-term in nature and that Hertz management, led by Chairman and CEO Mark Frissora, will succeed in overcoming these short term issues. However, we continue to see an alignment of new forces from within and outside of the traditional car rental ecosystem that can put significant pressure on the earnings power of Hertz and its industry peers. We continue to view car rental as a highly cyclical business. In a great year, we believe it is possible for Hertz to achieve an EPS in the $3 range (based on current share count). In a bad year, we believe losses are possible (even excluding 1-time restructuring expenses). In a normal year, we see Hertz´s earnings power at around $1.50 per share.
Despite mounting evidence of industry challenges, Hertz shares continue to trade at all-time highs. Our valuation of Hertz shares suggests substantial downside from current levels. We recommend investors take advantage of the unique market conditions (near record high used car prices and constructive activist sentiment) to reduce exposure.
How much downside? Jonas cut his price target on Hertz to $19 from $20. With Hertz shares off 1.3% at $30.34 today, that means shares could fall an additional 37%. Shares of Avis Budget Group (CAR) have fallen 1.1% to $67.97.
No comments:
Post a Comment