Hertz Is Full of Special Situations, and I'm Buying

The month of May has been full of spinoffs, and my Special Situations portfolio has been buying some of them. Today I'm back to buy shares of Hertz Global (NYSE: HTZ  ) , which plans to spin off its equipment rental business in early 2015. Combined with a buyback that could see as much as 20% of the share count taken out and a consolidating car-rental market and the company's increased target leverage and the operating leverage of the business in a growing economy, I'm highly confident that Hertz is a great stock for the next few years. So I'm buying stock later this week.

The special situations
The special situations begin with Hertz's decision to spin off its equipment rental division HERC early next year. From both operational and financial standpoints, the decision makes a lot of sense. On the financial side, the cash flow drag from the equipment business will be eliminated, allowing the improving fundamentals of the car business to shine.

And that's important as the car-rental industry consolidates to three major players, including Avis Budget and Enterprise. That consolidation should help pricing across the industry, and rivals should slow efforts to gain share for its own sake, leading to earnings gains at Hertz.

As part of the spinoff, Hertz should receive cash proceeds of $2.5 billion. That's coming from an equivalent amount that the spinoff company will raise in debt and then pay to the parent. Some of that cash will be used to pay down debt, but Hertz is planning to also use some for a $1 billion buyback. That's in addition to $1 billion already authorized for repurchases. In total, the company estimates it might be able to buy as much as 20% of the outstanding shares. That's an excellent move, with shares trading at about 14 times this year's earnings and substantial earnings growth for 2015. A buyback will only accelerate any earnings-per-share growth.

Also positive is the news that Hertz has increased its target leverage ratio, to between 2.5 times and 3.5 times net debt/EBITDA. That increase may allow Hertz to "opportunistically look to return additional capital to shareholders on an ongoing basis." That's the kind of news a special-situations investor likes to hear.

As we approach the date of the spinoff, it will be interesting to see what valuation the market gives HERC, and that company -- which comprised just 15% of Hertz's combined total revenue -- could well be a buy in its own right.

Foolish bottom line
My Special Situations portfolio will buy $500 of Hertz now, and will look to add more as the special situation unfolds or as prices make it look particularly attractive. There are simply too many catalysts here for the stock not to appreciate over time. So we have lots of ways to win, and that's the kind of optionality I like to have. Like this idea? I have many more money-making ideas, and you can be the first to know them by following me on Twitter: @TMFRoyal. And check out my dedicated discussion board.

Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Interested in Hertz or have another stock to share? Check out my discussion board or follow me on Twitter @TMFRoyal.


Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 28, 2014, at 12:18 AM, AutoguyRetired wrote:

    Little caution may be advisable. Hertz has not been paying vendors according to Terms and is running 90-120 behind on large chick s of their A/P. Their conversation to Tririga has been a huge stumble and the turmoil of the Purchase of Thrifty & Dollar -

    Compounded with the move of their corporate HQ to a location closer to CEO/President Mark Frissora's Florida home has resulted in significant Mid/top management losses. Mostly those with significant tenure.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2968808, ~/Articles/ArticleHandler.aspx, 10/22/2014 1:10:29 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement