The Hertz Sell-Off Could Be an Opportunity

The Hertz Sell-Off Could Be an Opportunity

Is Hertz Global back on the cheap? After a year-long run-up that took the stock from around $14 per share to nearly $28 in August, the market has taken the company back down a peg or two.

Earlier this year, an investment competition sponsored (and partly judged) by hedge fund Pershing Square awarded its top prize to a group who pegged Hertz as an undervalued pick with around 50% upside potential. The main driver behind Hertz's value proposition is its merger with Dollar Thrifty. Now that the stock is trading at around the same levels as when the report went public, should investors take a look at the cheapened car rental giant?

The pitch
Hertz is a massive business, especially after its acquisition. The company has more than 10,000 locations in 18 countries. The company is one of three survivors in a massive game of industry consolidation, with the other two being Enterprise and Avis Budget. While this factor has many implications, an important one to remember in this case is that the quest for market share has somewhat subsided for the three companies, instead allowing them to focus on profitability.

In the past, the company had focused on a quality and service strategy to gain and retain its market share, instead of being price-focused (as opposed to its Dollar Thrifty segment, a winner in the value rental space). Yet, at the same time, it has not driven its growth by price increases, either. As pointed out in the presentation, management has now shifted to some price increases in the fleet. Other areas that will drive top-line sales include the aforementioned Dollar Thrifty business (growing well into the double-digits year-over-year) and Hertz on Demand, an hourly rental service that the report says is growing at 30%.

So, with all of the good news and positive research, why has the stock retreated in recent weeks? More important, should investors view it as a second chance?

The problems
Since February, management steered guidance down about $50 million for the year. Adding more fuel to the fire is that net income was guided down $50 million as well. The reasons were simple yet troubling: lower rental revenue, lower utilization, and lower used car prices. Investors can note that cash flow projections remain the same at $500 million to $600 million.

Shortly following, the company's CFO resigned. Management cited the reason as relocation-related, which may very well be true. The timing of both downward revised earnings and the company's chief finance officer stepping down clearly rattled the market.

These factors, unsettling as they may be, do not take away from the long-term value acquired with the Dollar Thrifty deal. The synergies, resulting in hundreds of millions in cost savings, combined with the growth platform, paints a picture of a leading company that is comfortably positioned against its two major competitors. In terms of valuation, the company is now trading at 13.4 times the bottom end of EPS guidance, and 12.7 times the high end. Looking further out, as the company internalizes Dollar Thrifty entirely and tacks it on to its existing businesses (including off-airport locations), that ratio goes even lower. Historically, Hertz has traded around 14 times earnings.

Things may not have gone as smoothly as the analysts who won the investing competition originally predicted, but the fundamentals behind both the pitch and Hertz itself remain intact. If the stock continues to trend down toward $22 per share, I'd consider taking a position.

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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings. 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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