Are You Going to Get Hurt by Hertz?

When looking for companies, the Foolish investor often considers a long-standing company in an important industry; an industry for which there is little substitute. An industry that matches this description is the rental-car business, and the company in question is Hertz (NYSE: HTZ  ) . Hertz was incorporated in Delaware in 1967, but is able to trace its roots through its predecessor components back to 1918.

Company Data
In that time, the company has grown to approximately 10,610 locations from which it rents out cars, trucks, and miscellaneous equipment. Of these locations, 10,270 (or 96.8%) relate to car and truck rental operations, while the remaining 340 (or 3.2%) are dedicated to renting industrial equipment. Interestingly, while such a small portion of its locations are focused on renting industrial equipment, this segment generated roughly 15% of the company's $9 billion in revenue for 2012.

Additionally, it happens to be the fastest-growing portion of the business, having increased its revenue by 14.5% from 2011 to 2012. In the same time, the company's car and truck rental operations grew by a far lesser, but still impressive, 7.8%.

Boasting operations in at least 150 countries, with the number-one spot in the U.S. in terms of airport-based car and truck rentals, and the number-two spot in the U.S. in terms of off-airport car and truck rentals, it cannot be denied that Hertz is a major force in the market. However, just because it is a big fish, doesn't mean that it is a good investment. In addition to having a market-leading position, the company has to have attractive financials to be considered a truly viable investment opportunity. So, with that being said, does Hertz have the gusto to perform well for you, or will it only serve to hit you where it Hertz?

Competition
For starters, looking at the company's financial statements, we see revenue has increased at a rate of about 8.3% per annum since at least 2009, which is a positive in such a low-growth economic environment. During the same time, the company has gone from a net loss of $126 million to a net gain of $243.1 million, marking a decent turnaround in spite of a $1.21 billion loss booked in 2008.

Although this change is attractive, the company is still left with a poor net profit margin of 2.7% for the year (the best in at least five years). This is particularly poor when compared to the 12.8% annualized revenue growth and 3.9% (though more inconsistent) 2012 net profit margin of Avis Budget Group (NASDAQ: CAR  ) .

Though not a perfect comparable, another rental company to compare it to is United Rentals (NYSE: URI  ) , a company whose primary focus is on the renting out of industrial equipment. Over the same time, United Rentals saw its revenue grow by 20.4% on an annualized basis (albeit with most of that growth occurring between 2011 and 2012), while its net profit margin was an unimpressive 1.8%. Based on these results, a preliminary assessment would deem Avis to be superior. However, we should keep in mind that the bottom line is not always the bottom line; liquidity and solvency should be assessed too.

Balance Sheet and Cash Flows
From a balance sheet perspective, Hertz is superior to its peers, with a four-year average current ratio (the current assets of the company divided by current liabilities) of 1.72 (1.55 now). What this means is that, for every dollar in liabilities that are due in the company's current accounting period, it has $1.72 with which to cover said liabilities.

In juxtaposition, Avis sports a mediocre 1.33 current ratio, while United Rentals comes in last place with a 1.16 averaged out over the past four years (though now it is at about 0.99). This suggests that, in the short-term, Hertz will likely have the easiest time paying its liabilities, while United Rentals may struggle.

In all actuality, these measures for their current ratios are OK, but each company appears to be loaded with debt. The long-term debt-to-equity ratio for Hertz is 6.16 (a number that has been on the rise since 2009), while Avis Budget Group stands at 12.75 and United Rental has a better (though still very high) 4.36. These numbers are alarming and have been a primary contributor to the paltry net profit margins of each company.

However, such a high ratio led me to discover that the debt the company has is tied to certain assets (primarily vehicles) that act as collateral. As such, hard times would most likely require the company to hand over specific assets and call things even than  result in bankruptcy.

Perhaps the area where Hertz excels the most is its free cash flow margin, which has averaged 24.9% over the past four years. This compares to 20.1% for Avis Budget Group and -3.6% (and worsening yearly) for United Rentals.

Foolish Takeaway
Looking at the data above, it appears Hertz is slightly more attractive than its peers. Although its net profit margin and long-term debt to equity falls in the middle of the pack, the company has greater liquidity, and far better free cash flows, suggesting it can warrant lower net profits and higher debt without being at risk. However, the company is far from the perfect investment, and at nearly 39 times 2012's earnings, is fairly expensive. As such, the Foolish investor would be wise to understand that any investment may take a while to pay off.

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