Investor Alert: Can Investors Buy Hertz Global in the Face of Accounting Issues?

Source: Wikimedia Commons

Hertz Global Holdings (NYSE: HTZ  )  investors were probably contemplating what to do with the company before it was due to report on June 9. However, the company shocked investors when it announced on June 6 that it would be delaying its earnings release in light of accounting restatements the business would be undergoing, likely from its 2011 through its 2013 fiscal years.

Even after seeing its shares tumble 9% in response to this news, the company's stock is still trading at a 40% premium to its 52-week low. These factors alone may entice its shareholders to exit the position and opt instead for United Rentals (NYSE: URI  ) , but is it possible that Hertz could still have plenty of room to run despite its accounting issues?

Mr. Market's expectations are mixed
For the quarter, analysts expect Hertz to report revenue of $2.56 billion. If this forecast comes to fruition, it will represent a 5% gain compared to the $2.44 billion management reported for the same quarter a year earlier. However, this upbeat forecast shouldn't come as too much of a surprise to the Foolish investor because the car-rental business has had a history of attractive growth.

Source: Hertz

While analysts are optimistic about Hertz's revenue, they are fairly pessimistic about its profits. For the quarter, analysts anticipate the business will report earnings per share of just $0.09, far lower than the $0.21 management relayed to investors during the first quarter of 2013. In spite of a rosy sales forecast, the business' bottom line will likely be negatively affected by high depreciation from non-fleet assets and some issues relating to its allowance for doubtful accounts coming from Brazil.

Is Hertz a good long-term pick, or is United Rentals better?
Over the past five years, Hertz has done really well for itself. Between 2009 and 2013, the car-rental business saw revenue climb 52% from $7.1 billion to $10.8 billion. During this period, all three of the company's major operations grew, but the biggest contributor to its top-line growth was its worldwide car-rental business, which grew sales by 47% from $5.9 billion to $8.7 billion.

HTZ Revenue (Annual) Chart

Hertz revenue (annual) data by YCharts

As strong as Hertz's growth has been though, it's been blown away by the success of United Rentals. Over the past five years, United Rentals saw its revenue skyrocket 110% from $2.4 billion to almost $5 billion. Like Hertz, United Rentals also experienced a huge uptick in rental revenue, but unlike Hertz, the company's source of sales growth came primarily from its equipment rentals. Between 2009 and 2013, this portion of the company's operations saw sales jump 133% from $1.8 billion to $4.2 billion.

While United Rentals has blown away Hertz when it comes to top-line growth, the business couldn't do the same from a profit perspective. Over the past five years, United Rentals saw its bottom line increase from a loss of $62 million to a gain of $387 million. This improvement was due, in part, to the company's rising sales; but it can also be attributed to its cost of goods sold falling from 74% of sales to 59.9%, while its selling, general, and administrative expenses dropped from 17.3% of sales to 13%.

HTZ Net Income (Annual) Chart

Hertz net income (annual) data by YCharts

Hertz's results were very similar to those posted by United Rentals. Over the past five years, the company saw its net loss of $126 million morph into a gain of $346.2 million. Just as in the case of United Rentals, Hertz benefited greatly from higher sales, but management also relayed to its shareholders that its cost structure had improved. Between 2009 and 2013, the company's cost of goods sold dropped from 57.5% of sales to 53.4%, while its interest expense fell from 8.7% of sales to 6.5%.

Foolish takeaway
As earnings approach, it's natural for investors to be worried about their holdings, especially when a company announces a major restatement and delays its anticipated earnings release. However, Hertz's long-term performance has been pretty good, so even if analysts are right and the company's profitability shows some contraction and even if a restatement does negatively impact its performance, it's not the end of the world. Rather, it might just be a small bump in the road.

This does not mean, however, that the business is necessarily the best prospect out there. In recent years, United Rentals has done far better than Hertz in terms of revenue growth and about the same on an earnings basis. While there can be no guarantee that the business can continue this trend, it should serve as a sign that investors should not dismiss it before analyzing it in more depth.

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Daniel Jones

Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!

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