Hertz (HTZG.Q) -- one of the largest car rental companies in the world -- unveiled its second-quarter earnings on Aug. 6th, topping analysts' estimates with a narrowing net loss of $63 million and revenue growth of 7%. Since the release, the stock has gained over 30%.
This is the first sign of any notable improvements from the company since its transformation in 2016 that split up the car and equipment rental businesses. However, the double-digit jolt in the share price and newfound investor confidence might be premature. If we go beyond the quarter, mounting losses and expenses leave a lot to be desired.
Image source: Hertz.
Hertz is still in the early days of its turnaround ...
The rental car operator has made a massive push into renewing its fleet with around 90% of vehicles comprised of newer, more popular models. Putting more in-demand vehicles on the road was an important step for the company to drive immediate top line growth.
Longer term, Hertz has invested heavily to replace legacy systems with modern artificial intelligence (AI) based technology that promises to improve demand and fleet forecasting, allowing the company to better match supply with demand in real time. The company's CFO previously mentioned that the old technology had been "a tax on our ability to innovate" as customers turned to competitors for more attractive choices and service. Hertz will also roll out new customer-friendly online and mobile-enabled tools, including its new booking and reservation system. The company plans to carry out a launch of its fleet management and accounting systems, booking and reservation system, and car rental system by the fall of 2019 with the full effect of the roll out to be seen some time in 2020.
Beginning next year, Hertz hopes to drive growth through these investments with enhanced marketing efforts, learnings from its new technology, cost reductions, a new CIO (which the company announced at the end of July), and upgraded CRM efforts.
... but the market conditions are favorable
Otherwise, the company is benefiting from the tailwind of rising market demand as it operates in an industry that's seeing healthy growth around the world. The company has itself acknowledged that market conditions are strong: "Industry fundamentals appear to be favorable and positive contributing to our results," said CFO Thomas Kennedy.
According to Orbis research, the global car rental market is expected to grow by over 9% and exceed $106 billion by 2022, driven primarily by international tourism with the Asia-Pacific region being the fastest growing.
While Hertz has ramped up its revenue in the U.S. and reported 7% growth recently, its international segment (25% of total sales) only expanded 2% (excluding foreign exchange gains), leaving plenty of opportunity on the table.
The rental car giant is playing catch up in an industry that's becoming more and more technology driven with online and connected services playing a greater role. The investments that Hertz is making today are all aimed at improving the company's competitiveness through data and customer service innovation as it looks to the future.
What do the financials tell us
Hertz narrowed its net loss in the second quarter by 60% and reported an adjusted EBITDA of $93 million, compared to $35 million one year prior. The EBITDA figure, however, is supported primarily by its international operations which came in at $81 million on revenue of $598 million. U.S. margins continue to be anemic at just 1% for adjusted EBITDA last quarter. With a net loss of $265 million for the first six months of 2018, Hertz is still far away from turning a profit.
One other thing to keep an eye on is the company's debt profile, as it has a sizable portion of $700 million outstanding that matures in 2020 with another series of borrowings that reach maturity each year for the next five years.
On top of increasing costs and poor operating margins, some investors are also concerned with the possibility of technological disruptions that occur in the industry, and whether or not Hertz has positioned itself well to tackle those opportunities. As the company will not start realizing the benefits of its investments until 2020 (the same time when its debt starts to mature) -- that's a lot of question marks for investors to consider before diving into the stock.
