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Why Hertz Global Holdings, Inc. Stock Is Riding Higher Today

By Nickey Friedman - Feb 20, 2014 at 2:15PM

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Hertz Global Holdings' rally is highly speculative.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Hertz Global Holdings (HTZG.Q) are being bought in bulk up; it's up as much as 6.3% today following news that it has landed a deal with Costco (COST 0.94%) to provide van rental services to its members.

So what: The deal is with 25 Costco's in the U.K. that allow members to rent a van for the equivalent of $22 per hour.

Hertz is already the largest car rental brand in the world. It has been seeking ways to generate additional revenue and profits by expanding its van service over the last five years. Through this deal, Hertz will handle the fleet and all customer transactions as if the rental occurred on its own property.

Costco benefits from increased purchases from its members and possibly enticing more memberships to be sold, which is how Costco makes the majority of its income. The wholesale club has little expense and risk while Hertz handles everything.

Now what: The deal is obviously a potentially good move for both companies, but the limited number of 25 Costco locations in the U.K. isn't a game changer for either company. Hertz currently operates 10,400 locations, whereas Costco operates 648. However, if the program is successful you can expect the partnership to be expanded to many other Costco locations, and possibly to other Hertz partners around the world.

Hertz has scored similar deals with the Casino supermarket chain in France, certain IKEA stores, and certain Lowe's stores. Look for expanded and new partnerships in the future.

Analysts currently expect a 7% increase in sales and a 22% growth in earnings for 2014. If and when these van service rental and similar programs expand more materially, look for analysts raise their estimates. The market seems to think so, although today's rally may have been a bit overheated and fueled by speculation. Still, I wouldn't necessarily expect a pullback. With Hertz trading at 13 times this year's current estimated earnings it appears to be priced on the cheap side considering its growth and the potential of that limited partnership.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale and Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$537.21 (0.94%) $5.01
Hertz Global Holdings, Inc. Stock Quote
Hertz Global Holdings, Inc.
HTZG.Q

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