3 Reasons Hertz Global Holdings Inc.'s Stock Could Fall

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We're still waiting for Hertz Global Holdings to revise its financials from 2011 to 2013, as well as to report its first-half 2014 numbers. When it comes to uncertainty, no news is bad news and every day of delay just adds another layer of doubt. Stockholders in the car rental company are now paying a painful price, as shares are close to flirting with a new 52-week low. Here are three concerns that could drive Hertz even lower.

Concern No. 1: What if the accounting problems are deeper than we think?
Sometimes where there is smoke there is fire. Accounting can be quite a sensitive issue when it comes to federal regulators. Hertz disclosed in an SEC filing the errors were discovered on May 13 of this year. It has yet to disclose any time frame for when it expects the reviews and adjustments to conclude.

A filing with the SEC stated,

"During the preparation of the First Quarter 10-Q, errors were identified relating to Hertz's conclusions regarding the capitalization and timing of depreciation for certain non-fleet assets, allowances for doubtful accounts in Brazil, as well as other items.  Hertz continued its review and recently identified additional errors related to allowances for uncollectible amounts with respect to renter obligations for damaged vehicles and restoration obligations at the end of facility leases."

The longer this drags out without answers the more questions pop into investors' heads, possibly including: Are the auditors finding even more problems than originally expected since on at least one occasion it found "additional errors"?  What are the "other items" mentioned?

Is it possible that there fraud involved? Could this lead to more serious problems and expenses with the regulatory agencies? Is the Hertz brand name and reputation at risk? Mind you, at this time there is no reason to suspect any purposeful wrongdoing but these are questions, probably unjustified, that inevitably pop into investors' heads.

The answers to these questions are anybody's guess. Until we get answers, the stock could drift lower; worse, those eventual answers might not be the ones we want to hear. The worst case imaginable is rather bad.

Concern 2: What does Carl Icahn know?
Activist and billionaire hedge-fund investor Carl Icahn revealed an 8.48% stake in Hertz and then demanded board seats in August. It didn't take long for the company to cave in and let Icahn help. Is this a sign that the company's operations are in deeper trouble than we've been led to believe?

Icahn in an SEC filing spoke of "operational failures" and a "lack of confidence in management." In recent weeks, he hasn't had much to say publicly, and the share price has tanked far below the price of that filing back in August. Now that he presumably has full access to the suite of information that other insiders have, did he find something that spells trouble?

Hertz CEO Mark Frissora stepped down for personal reasons according to an announcement on Sept. 8. Did he really quit, or was he forced out?  The news came less than a month after Icahn made public his intention for management change. Ousting a CEO is rarely a good sign. We don't have a clue to how operations are going, but we can be reasonably sure Frissora would not have quit or been fired if operations were busting out to record levels. Things could be worse than we think, with much operational damage yet to repair.

Concern 3: Birds of a feather
On Sept. 30, Avis Budget Group  CFO David Wyshner made a presentation at the Leveraged Finance Conference. He gave some information on recent trends in the industry in general, which means it probably applies to Hertz as well as Avis.

Wyshner warned: "Used car prices have continued to soften over the last several months ... probably more than typical season patterns would explain" due to the high level of recalls this year. Used car prices and their effect on revenue are an important part of the overall results for rental car companies." 

"In our international segment, demand was softer than we expected, particularly in Europe," he added referring to the summer quarter that just ended. Wyshner explained that the car rental market was overfleeted in Europe, which upsets the supply and demand equation on the continent. As a consequence, Wyshner said the higher end of the 2014 EBITDA guidance range of $860 million to $910 million would be challenging due to the unexpected softness.

With now public knowledge of the more challenging summer quarter for Avis Budget Group might very well be also challenging for the larger Budget Global Holdings. How long these challenges prevail are a mystery.  Until we have updated financials from Hertz the speculative and risky nature of the stock only grows. Caution is advised.

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The article 3 Reasons Hertz Global Holdings Inc.'s Stock Could Fall originally appeared on Fool.com.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Hertz Global Holdings and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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