Bill Ackman's fund, Pershing Square Capital Management, owns less than a dozen stocks, so when the fund takes a new position, the market pays close attention. Ackman rose to fame as an activist short-seller, making large bets against companies and doing everything in his power to make his case known. Over the years, these positions led to some epic battles, including Ackman and Carl Icahn's war over the nutrition supplement stock Herbalife. These days, Ackman mostly takes long positions.
In his recent bet, Ackman invested in an auto stock that has previously struggled and that Wall Street analysts are bearish on. Does the billionaire investor know something Wall Street doesn't?
It's been a long five years for Hertz
Recently, Ackman confirmed a CNBC report that Pershing has acquired a 19.8% stake in the car rental company Hertz (HTZ 1.74%). The report sent the stock soaring. Between April 16 and the close of the market on April 17, the stock more than doubled.
Hertz has struggled immensely since 2020. The COVID-19 pandemic sent demand plummeting, and the company ended up filing for bankruptcy protection in May 2020. The vehicle rental services business reemerged from bankruptcy in 2021, but is still reportedly in a legal fight with creditors over a $300 million payout.
Operationally, the company has not fared well, either, reporting a nearly $2.9 billion loss in 2024. Much of this loss came from a poor bet the company made when it chose to purchase 100,000 Tesla vehicles in 2021 for $4.2 billion. However, it turned out that car renters were not as interested in the vehicles, primarily over concerns about finding charging stations. Former Hertz CEO Stephen Scherr resigned in March 2024 and the company has sold some 30,000 of its Teslas to rightsize its fleet. Hertz in the third quarter of 2024 took a more than $1 billion long-lived asset impairment, citing "the decline in fleet residual values over the last year or so."
The bull and bear thesis
Ackman now sees a turnaround story in the making and has faith in new CEO Gil West, who previously served as chief operating officer of Delta Air Lines and General Motors. In a post on X, Ackman wrote that he thinks the company can create shareholder value as behavior among competitors becomes more rational, as the company rightsizes its Tesla inventory, as management improves operations, and given Hertz's leveraged capital structure.
Ackman also thinks Hertz will be a good play on the ongoing tariff battle. He noted that tariffs are likely to lead to higher used-car prices. With Hertz owning a fleet of 500,000 vehicles valued at $12 billion, a 10% increase would lead to a $1.2 billion gain on the vehicle assets, which would equate to nearly half of Hertz's total market cap (as of April 18). Ackman also speculated on the possibility of Hertz partnering with Uber, another stock Pershing owns, for an autonomous vehicle rollout over time. The idea actually drew a response from Uber CEO Dara Khosrowshahi, who said on X that he is "excited to brainstorm" how Uber can expand its existing relationship with Hertz.
NASDAQ: HTZ
Key Data Points
Ackman also seems to have faith in management's target of lowering fleet depreciation per unit (DPU) per month to about $300 and getting revenue per unit (RPU) per month to around $1,500 per vehicle. At the end of the fourth quarter, DPU was $422, down 16% year over year, while RPU was $1,376, down 1% year over year. Based on some of these goals, Ackman thinks Hertz could generate $2 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2029. At a 7.5 times adjusted EBITDA multiple, shares would be worth $30, which would be a roughly 306% gain from current levels of $7.38 per share (as of April 21).
While the multibagger thesis is exciting, most analysts seem to share a different view. Over the last three months, four analysts have issued research reports on the company, with two recommending hold and two saying "sell." This essentially amounts to a sell rating on the Street, as analysts usually avoid rating a stock a sell when possible. The average price target, according to TipRanks, is also $2.93, implying significant downside.
Following the reveal of Pershing's stake in Hertz, Bank of America analyst John Babcock issued a report, suggesting that Hertz's higher share price may make it easier for the company to tap the capital markets to raise capital. Babcock thinks the company will need to raise about $500 million based on its projected use of free cash flow this year and in 2026. The analyst maintained an underperform rating and a $2.70 share price.
It's a high-risk, high-reward play
Ackman's thesis is interesting and, in my opinion, holds substantial potential. That said, much remains to be seen. Hertz still has significant debt and vehicle utilization did not rise significantly in 2024, while RPU also fell, so there wasn't much progress in those operational metrics. Furthermore, if Babcock is right and Hertz raises capital, that could dilute shares.
I also detect potential meme stock trading activity in Hertz, which was actually the original meme stock before GameStop.
I'm not saying there isn't a bullish case, but the big move following Ackman's disclosure may have been exaggerated. For these reasons, I'd recommend a smaller, more speculative position right now. There are still a lot of variables left to play out, including a potential capital raise, so I'd keep this one on your watch list and wait for dips or signs of operational progress in the turnaround to accumulate more shares.
