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Coverage Initiation: Hertz Global Holdings
Hertz Global Holdings (HTZ) recently made its debut in The Value Line Investment Survey. The company is probably most recognizable as an operator of one of the largest car rental businesses in the world, with a network that spans over 8,100 locations in approximately 145 countries. This segment operates predominately at or near airports, as well as in central business districts and suburban areas of cities in North America, Europe, Latin America, Asia, Australia, and New Zealand. In 2009, the car rental business accounted for 84.2% ($5.9 billion) of Hertz’s total revenue.
Although not as well known, Hertz also operates an extensive equipment rental business that spans 322 locations in the United States, Canada, France, Spain, and China. Rentals in this segment include earth-moving equipment, aerial and electrical equipment, construction-related trucks, and various other items. In 2009, the equipment rental business accounted for 15.6% ($1.1 billion) of Hertz’s total revenue.
In recent years, Hertz has struggled, partly due to sluggish economic activity, but also due to the emergence of increased competition within the market place. Companies like Enterprise, Avis Budget Group (CAR), and Dollar Thrifty (DTG) (DTG is currently in talks to be acquired by CAR), have managed to steal market share away from Hertz dating back to 2004. In 2004 (before going public), Hertz accounted for almost 30% of car rental revenues in the United States. By 2007, that figure fallen to about 27%, and in its most recently reported year (2009), Hertz accounted for just under 26%. Enterprise, which also owns the National and Alamo brands, has taken over as industry leader accounting for 31% of the market.
Despite elevated competition, we look for improving economic conditions to help bolster solid bottom-line growth for Hertz in the coming years. As of late, post-recessionary pressures have resulted in a considerable decline in air travel around the globe, which doesn’t exactly augur well for Hertz considering a large majority of locations are at or around airports. However, as the economy gains further stability, consumers will likely be more apt to travel which should result in an uptick in volume for the industry as a whole. Couple this with management’s aggressive expansion strategy and an increased customer base, and we project Hertz’s earnings will advance steadily out to 2013-2015.
All told, it has been apparent in recent years that the company’s operations are largely influenced by general economic conditions. Although we are encouraged with Hertz’s long-term prospects, lingering uncertainties within the economy (i.e. high unemployment and tightened credit markets) add an element of risk to HTZ stock in the near term. Accordingly, conservative accounts may want to avoid these shares for the time being. Venturesome investors may consider taking a position here.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.