Hertz Global Holdings (HTZG.Q) recently announced that it will restate its results to adjust its depreciation schedule for "non-core assets" and allowance for doubtful accounts in Brazil. These terms make the announcement seem scary and rattled shareholders for nearly a week. However, after the initial shock wore off, this does not appear to be holding back the stock price. Shares of Hertz rebounded impressively, but its year-to-date return still doesn't compare with that of Avis Budget Group (CAR -5.81%). Is this an indication that Hertz' stock could close the gap with its peer?
The May and June delays were a one-two punch but the stock is back up
On May 13, Hertz announced that it needed additional time to file its 10-Q due to questionable assumptions for the company's "capitalization and timing of depreciation for non-fleet expenditures." This seemed like an issue that the company could resolve quickly that was brought to light by the installation of the firms Enterprise Resource Planning system . This is software used to run most everything in the business from sales projections to accounting. Its a bear to set up and often causes companies to change their procedures rather than modify the software. However, it could be a good thing for shareholders if you believe that streamlined accounting practices improve visibility into the company's earnings power. Generally speaking, better visibility = more trust = higher stock multiple.
The scope of this problem expanded on June 6 when Hertz reported that its first-quarter results would be below expectations and the changes in assumptions will cause it to restate its 2011 results and review financial records from 2012 and 2013 to determine if those also need adjustment. This caused an immediate 12% drop in the share price, and since June 6 we haven't had any updates. Why would the shares rebound then?
Spin-out will accelerate EPS growth
The biggest issue that will affect Hertz in the next 12 months will likely be the spin-out of its $1.5 billion equipment rental unit. Hertz expects the transaction to take place in early 2015 and it will net the company $2.5 billion to pay down debt. CFO Mark Frissora believes that Hertz can conduct the spin-out on a tax-free basis as long as the company does not use its proceeds to buy more than 20% of the new company. This doesn't prevent Hertz from aggressively buying back its shares before the transaction closes though, which might explain some of the recent support for the share price.
The lighter debt load and smaller share count will generate EPS growth in 2015. In the meantime, Hertz is trying to grow its top line by letting prices rise. Even though the company instituted two price increases in the U.S. in December, its guidance calls for flat pricing. If the market for car rentals holds up, this alone would contribute to earnings growth.
Avis has outperformed due to transactions and Hertz may do so as well
Avis has had a stellar year as shareholders capitalized on the enthusiasm for its acquisitions. Year to date, Avis shares are up 51% while the S&P is only up 6.9%. A large part of this move resulted from reacceleration in North American revenue growth to 13% on 4% volume growth . Since volume growth is only 4% in its core business, the bulk of the upside to revenue came from acquisitions and investors are willing to reward the company handsomely for the acquired revenue. When Hertz completes its spinoff and shows earnings growth, even if it is due to financial management, the stock should be rewarded as Avis was..
Shares of Hertz are holding up despite concerns about the restatement
It's too early to suggest that Hertz's restatement has been fully read into the stock price but the company seems to have been given a hall pass. Since the June 6 announcement, when the shares lost 12% of their value overnight, the stock rebounded 10% from its low of $26.15. Although accounting assumptions do impact earnings growth, the bigger picture issues of stable demand, improving pricing, a lower debt load, and reduced share count could have bigger impacts on Hertz's earnings growth than its depreciation expense for non-fleet cars.
