The Motley Fool Previous Page

The Hertz Sell-Off Could Be an Opportunity

Michael Lewis
October 8, 2013

Is Hertz Global (NYSE: HTZ) back on the cheap? After a year-long run-up that took the stock from around $14 per share to nearly $28 in August, the market has taken the company back down a peg or two.

Earlier this year, an investment competition sponsored (and partly judged) by hedge fund Pershing Square awarded its top prize to a group who pegged Hertz as an undervalued pick with around 50% upside potential. The main driver behind Hertz's value proposition is its merger with Dollar Thrifty. Now that the stock is trading at around the same levels as when the report went public, should investors take a look at the cheapened car rental giant?

The pitch
Hertz is a massive business, especially after its acquisition. The company has more than 10,000 locations in 18 countries. The company is one of three survivors in a massive game of industry consolidation, with the other two being Enterprise and Avis Budget. While this factor has many implications, an important one to remember in this case is that the quest for market share has somewhat subsided for the three companies, instead allowing them to focus on profitability.

In the past, the company had focused on a quality and service strategy to gain and retain its market share, instead of being price-focused (as opposed to its Dollar Thrifty segment, a winner in the value rental space). Yet, at the same time, it has not driven its growth by price increases, either. As pointed out in the presentation, management has now shifted to some price increases in the fleet. Other areas that will drive top-line sales include the aforementioned Dollar Thrifty business (growing well into the double-digits year-over-year) and Hertz on Demand, an hourly rental service that the report says is growing at 30%.

So, with all of the good news and positive research, why has the stock retreated in recent weeks? More important, should investors view it as a second chance?

The problems
Since February, management steered guidance down about $50