2024-01-14 11:45:34 ET
Summary
- Hertz plans to sell off a third of its electric vehicle fleet due to lower demand and soaring repair costs.
- The ESG movement, in which EV autos play a significant role, may be showing cracks while used car prices are moving sharply lower.
- Hertz's stock performance has been weak, and its valuation is low while the technical picture is soft following a bearish breakdown late last year.
- With negative free cash flow in the past year, I highlight key price levels to watch ahead of earnings due out next month.
Is the EV trade in trouble? Earlier this month, Hertz (HTZ) announced that it plans to sell off a third of its electric vehicle fleet, opting to buy gasoline-powered cars with some of the cash proceeds.
The firm sees lower demand for EVs while repair costs for that group of vehicles have soared. The decision came after a very poor stock performance in the last year. Bigger picture, the ESG movement, for which EV autos play a significant role, may be showing cracks, according to my interpretation of the number of ESG mentions on quarterly conference calls.
I reiterate my hold rating on Hertz. I see its valuation as deservedly low while the technical picture is weak as the stock makes another run at $8 support.
EV Costs Rise, ESG Losing Its Luster Among C Suites
For background, HTZ operates as a vehicle rental company. It operates through two segments, Americas Rental Car and International Rental Car. The company provides vehicle rental services under the Hertz, Dollar, and Thrifty brands from company-owned, licensee, and franchisee locations across the globe.
The Florida-based $2.8 billion market cap Passenger Ground Transportation industry company within the Industrials sector trades at a low 5.0 forward non-GAAP price-to-earnings ratio and does not pay a dividend. Ahead of earnings due out next month, shares trade with a high 65% implied volatility percentage while short interest on the stock is extremely high at 16.8% as of January 11, 2024.
Back in October, Hertz reported a weak quarter. Q3 non-GAAP EPS of $0.70 missed the Wall Street consensus outlook of $0.83 while revenue of $2.7 billion, up 8% from year-ago levels, missed modestly. Shares fell around the report but eventually stabilized in the $8 to $9 range before rallying toward year-end. There was good news in its monthly revenue per unit metric which hit $1,596 amid a strong 83% utilization rate, up 320 basis points from the same period in 2022. Still, lower used car prices may be hurting the rental car operating – monthly fleet depreciation per unit was $282, a 52% jump year-on-year.
Global Results – Year Over Year
Wholesale Used-Vehicle Prices Decrease in December, End Year Down 7.0%
On valuation , analysts expect a continued decline in profitability. Per-share operating earnings are forecast to fall from $1.79 last year to just $1.22 in 2024. A modest uptick in EPS is then the expectation looking ahead to 2025. With a slew of earnings downgrades in the last three months, however, I fear that the earnings outlook could dimmer further, and that 2025’s 23% non-GAAP EPS growth advance may come down.
Still, Hertz has positive revenue trends to consider, but with sharply negative free cash flow over the last 12 months (on the order of -$8.96), the company is burning through cash right now. Total cash per share is just $1.92 compared to outstanding debt of more than $18 billion, resulting in a total debt-to-equity ratio of 534.
Hertz: Earnings, Valuation, Bearish EPS Revision History
If we assume normalized operating EPS of $1.30 and apply an earnings multiple of 6, near its long-term average, then shares should trade near $7.80. Given troubled fundamentals and poor free cash flow trends, that valuation should be taken with low confidence. Even if we assign it that fundamental worth, the stock is modestly overvalued today. I highlighted fundamental risks in my analysis a year ago .
Hertz: A Low Valuation Warranted, No Yield, Negative Free Cash Flow
Compared to its peers , HTZ features a low valuation (though weak valuation metrics are likely warranted given the very poor growth outlook). Profitability trends are likewise softer than its competitors while share-price momentum has been very weak over the last year. Finally, as mentioned before, sellside analysts have come out more bearish on HTZ’s earnings outlook over the past 90 days.
Competitor Analysis
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2023 earnings date of Tuesday, February 6 BMO with a conference call immediately after the results cross the wires. You can listen live here .
Corporate Event Risk Calendar
The Technical Take
HTZ is down about 50% since I first reported on the stock. Notice in the chart below that shares consolidated for many months following some meme-stock mania at times in 2021 right after its IPO. Then came a protracted trading range with key support at the $15 mark. A series of lower highs made for a bearish descending triangle pattern with a height of about $7 at the triangle’s onset. That $7 height is key because once HTZ broke down under $15 support, a bearish measured move price target to $8 was triggered in September last year. Indeed, that target played out almost to the penny.
HTZ hit $8 in November and then bounced back, retracing about 50% of the September-November decline. The stock has fallen back under $9 after breaking an uptrend in its RSI momentum oscillator at the top of the graph. With shares now retesting support, there is the chance it could break down again, but the technical indicators are about balanced. Long with a stop under $7.80 could work, but this is very much a ‘falling knife’ kind of stock, and sitting on the sidelines is prudent here. Moreover, HTZ’s long-term 200-day moving average is negatively sloped, indicating that the bears are in control for the time being.
Overall, I would avoid HTZ right now despite the stock making another approach of key support at $8 and high short interest is always an important risk for those looking to short the stock.
HTZ: Shares Fall to $8 Support, Momentum Turns Lower
The Bottom Line
I reiterate my hold rating on HTZ. I underscored the fundamental challenges with the car rental company early in 2023, but was hesitant to assign it an outright sell rating given the depressed valuation. Still, the fundamentals turned worse while the technicals broke down. Today, with a mid-single-digit P/E and shares near support, I once again see it as a hold.
For further details see:
Hertz: Ditching EVs, Fundamentally Challenged, Shares Near Support