Rising automobile costs and more airline travel both helped car-rental service provider Hertz Global Holdings (NYSE: HTZ) rev up in its second quarter. But will debt cause it to sputter in the long term?
The quarter
Hertz posted better-than-expected second-quarter results as a gradually strengthening economic recovery helped send demand for its services higher. The company benefited from strong travel demand and low depreciation costs and raised its full-year outlook.
Revenues for the quarter stood at $2.1 billion, a 10.3% year-on-year jump, though favorable foreign currency exchange rates alone accounted for nearly half of the increase. The bottom line almost doubled to $116.6 million from $58.5 million in the year-ago period.
Net income from car rentals grew by 38.5%, while the number for equipment rentals more than doubled. Other than higher demand resulting from better economic conditions, the bottom line grew because of an increase in the number of car-service days, better cost management, and better market values for vehicles following their leasing lives.
Dependence on other industries
There was an increase in airline-passenger traffic during the second quarter, and that was good news for Hertz, which has several airline partners worldwide, such as Southwest Airlines (NYSE: LUV), which remained the top domestic carrier, and Delta Air Lines (NYSE: DAL), which carried the most total and international fliers over the period. Hertz also has service partners such as Expedia (Nasdaq: EXPE) that have proved to be quite valuable but also make the company sensitive to global economic conditions.
Also playing in Hertz's favor is that the automobile industry has been increasing prices on its vehicles to cover costs. When that happens, second-hand and rental cars become a more favorable option. Rival Avis Budget Group (Nasdaq: CAR), which doubled its second-quarter profits, also appeared to benefit from this trend.
Digging deeper
Hertz increased its fleet to 487,600 cars, an 8.7% increase from the year-ago period. But although the company can now meet more demand, the increase was funded by debt. Already highly leveraged, Hertz broadened its total debt from $10.75 billion last quarter to $11.69 billion. With only $2.1 billion in equity and an interest coverage ratio at a worrisome 1.8, Hertz clearly is in danger of biting off more than it can chew.
The Foolish bottom line
Hertz has increased its full-year earnings outlook, expecting EPS of $0.91 to $0.96. The company has shown growth in its numbers over the past six quarters. However, in the long run, high debt could weigh on its profitability.
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