A Bitter Pill to Swallow for Hertz

Car rental agency is pushed to act in response to hedge fund interest.

Jan 2, 2014 at 10:10PM

The consolidation wave that drove Hertz (NYSE:HTZ) to acquire Dollar Thrifty, and Avis Budget Group (NASDAQ:CAR) to pick up Zipcar and Payless last year, ought to provide them with substantial pricing power to bolster their bottom lines and undergird their valuations. If the economy continues to improve, business in their key markets -- airports -- will also strengthen, a key consideration because the segment lends itself to higher car rental rates and margins.

Screen Shot

Source: Hertz

It's likely that's what's piquing the interest of private equity firms in Hertz. CNBC reports that hedge-fund operator Daniel Loeb, of Third Point Capital, acquired a less-than 5% stake in Hertz, meaning it's not so large as to require a mandatory SEC filing, but still suggests heightened awareness that there may be opportunity. When you consider that it's coming after Corvex Capital also reportedly met with Hertz management, you can get a better understanding of why the car rental agency adopted a shareholder rights plan.

Such plans, also called poison pill defenses, massively dilute everyone's ownership stake if someone acquires more than the rights plan allows. Although effective, they're seen as not being shareholder friendly (despite their name) because they tend to entrench management and reward subpar performance.

Hertz is under pressure for disappointing earnings this year due to weak airport volumes that led it to cut guidance in September. Business bounced back a bit in the third quarter following resolution of the government shutdown, but its capital intensive equipment rental business remains a point of contention, and further weakness could give private equity the wedge it needs to assail the rental agency.

Hertz reported that third-quarter non-contracted pricing rose 4.3%, with total pricing up 3.1% in North America, with trends also positive in Europe and at airports. As the bulk of the synergies  from Dollar Thrifty are expected to come this year and next, the car rental giant says pricing will remain key for it in 2014. Similarly, Avis was able to report its third-consecutive quarter of year-over-year increases in pricing, exclusive of any acquisitions it made, rising 40 basis points in North America, and up about 1% when controlled for currency exchange rates.

Hertz hasn't been able to fully capitalize on that pricing power yet because it's mired in the collapse of its old Advantage discount car rental business that it was required to divest as part of the Dollar Thrifty acquisition. The company that bought Advantage ran into liquidity problems and fell into bankruptcy; Hertz estimates its exposure to the Advantage debacle is in the range of $50 million to $70 million.  

Even though it's hemmed in by the Advantage squabble, the failure of its one-time subsidiary actually puts Hertz in a better position to increase revenues and profits going forward. Between Hertz, Avis, and the biggest car rental company, privately held Enterprise Rent-a-Car, the three have been able to raise rates at their fastest clip since the recession, and the demise of a low-cost option works to their benefit.

At 13 times expected earnings, Hertz is valued similarly to car rental rival Avis on one hand, and equipment leasing leader United Rentals (NYSE:URI) on the other. Yet the equipment business accounts for 15% of Hertz's revenues, and has been targeted for cost-cutting measures amid a wave of consolidation, which is exactly what occurred in car rentals. United Rentals has led the way there and was able to nearly double in size last year after acquiring RSC. Responding to the outside pressure, though, Hertz now says it may want to spin off the business.

However, the twin developments of the interest by hedge funds, and the adoption of a shareholders rights plan, served to drive Hertz' stock 10% higher on the last trading day of the year, giving it a gain of 75% in 2013, though that still lagged Avis, which saw its stock more than double.

Still, calving off its equipment rental business, along with expansion of its car-sharing program, could put Hertz in the driver's seat to an even better 2014. While the maneuvering by hedge-fund operators may have forced the car rental agency's hand to act earlier than it may have wanted, investors ought to see clear roads ahead.

Drive off with this winner
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

Fool contributor Rich Duprey 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers