S2E45 – Is Hertz (HTZ) stock a buy?

Key Timecodes

• 00:20 – MOS/Financials
• 01:40 – Meaning / Business Model
• 05:43 – Moat / Competition
• 09:49 – Management / CEO
• 11:28 – Conclusion

Transcription

[00:00:00.390] – Sean

Hey. In this video I’m going to review Hertz, the rental car company. So we’re going to do a 4M analysis. I’ll start with the margin of safety. That’s the math part of investing that Tykr does for us.  

[00:00:11.410] – Sean

And then we’ll talk about the meaning mode and management. Let’s dive in.  

[00:00:19.990] – Sean

So with this stock, I was a bit surprised when I first logged in. I see 95 out of 100. That is outstanding. This is a company that went bankrupt and then went recently public in the last few years. So to hit a score that high and we’ll get into the reason behind that in a little bit.  

[00:00:37.480] – Sean

But overall that is quite impressive. Then we look at the margin of safety. You can see here 90% share price is around $18. And then the fair value is 93. So a lot of upside potential.  

[00:00:48.750] – Sean

But overall the financials do look really good. Tykr saves us a lot of time, so we don’t have to spend a lot of time here in the financials. I did want to show you one thing. We’ll go to the financials tab. We are on quarterly, and if we jump to income statements, actually go to EPS.  

[00:01:07.870] – Sean

This is really what drives that margin of safety. You can look at our open source calculations. You just go to Tykr, there’s an education tab, and then below that there’s a drop down and you can read about the calculations. But this is really impressive. We went from a point 91 on the most two quarters ago.  

[00:01:28.150] – Sean

Our EPS went up to 236. So really nice improvement there. So that’s a key driver. All the financials are looking really good. Again, 95 is outstanding.  

[00:01:39.280] – Sean

But let’s spend a little more time on the business. Just to give a little context, I like to do a review, like a historical review of a company so I really understand where they’ve been and kind of bring us to date. This was really fascinating. I won’t spend too much time in the history, but this was cool. 1918 company was founded and they first rented out model T cars.  

[00:02:01.620] – Sean

I did not know that. We fast forward to what recently happened two years ago. Of course you had COVID. And what happened during that time is a lot of people stopped traveling. If we take a closer look at what happened in 2020, hz was not able to cover the payments, the auto loan payments for its automobile fleet.  

[00:02:23.970] – Sean

Like a lot of people take out a loan on a vehicle. Automotive companies or rental car companies will do the same thing. They don’t own those vehicles outright, so they have loans. Well, with COVID, people stop traveling, which means revenue drastically declined. But they still had to pay for these vehicles.  

[00:02:40.750] – Sean

So they weren’t looking for institutional help from banks. And those banks did not help from us. It was actually May of 2020. Hz filed for bankruptcy and then they were delisted from the new York Stock Exchange. Well, what happened thereafter, just a few months after Is, they were seeking a billion dollars to raise funds to really restart the company again.  

[00:03:06.090] – Sean

And then it looks like they went public again in 2021, the market started opening up, COVID came less prominent and people started traveling again. And that’s what really caused this company to take off again, which was quite an impressive turnaround. You usually don’t see that when a company goes private and then it’s recovered. But because of COVID, this was a unique circumstance. But anyway, let’s jump into the business model a little bit.  

[00:03:33.990] – Sean

So there’s really three ways a rental car company makes money. Obviously rentals, that’s the primary revenue stream. Number two would be addons. These are the addons a lot of people pay for and really they don’t have to. So I’ll break this down.  

[00:03:48.550] – Sean

You can pay up front for the full tank of gas in most cases. I was doing some homework here when they do that, rental car companies do that. They’re actually charging you almost more to do that. So it’s best if you’re a traveler, just pay for the gas when you’re out. Don’t worry about the full tank of gas situation.  

[00:04:07.270] – Sean

They’re going to get you on that. Number two is insurance. They’re going to try to upsell you insurance and try to sell you in a way that your insurance company does not cover the costs. What happens to the vehicle? What you should do is before you go on vacation and you are renting a car, call your insurance company and double check.  

[00:04:26.880] – Sean

That way you’re not paying two different companies for essentially the same coverage. And then the third way to get you with these little add ons is tolls. So they’re going to charge you as much as $20 a day. But it’s better if you just pay for the tolls yourself. Like if you’re crossing border in the States, for example, where I live in Wisconsin, you cross the border to Illinois, you’re going to pay a couple of bucks.  

[00:04:51.720] – Sean

No need to pay $20 for the full day. The third reason is automobile sales. Usually when these vehicles get to about 20 to 25,000 miles, the rental companies are going to sell those cars to consumers directly as an option, otherwise dealerships or other companies. So that’s the third way they make money. So let’s break down some of the most recent news with this business, just kind of highlighting a few details here.  

[00:05:19.780] – Sean

They do have really high debt. Rental car companies typically do because again, they don’t own their inventory. They have loans out on those cars. There’s another article here from Zach that talks about they’re calling this business a strong buy because that EPS, like I pointed out before, it’s really increasing quickly. So that’s good news for those that do hold hurts.  

[00:05:43.170] – Sean

But I’m going to talk about the competition here in a little bit. They did talk about there’s an article here from Wired is rental car prices have increased. That’s because companies like Kurtz, they don’t have the amount of cars that they used to. For example, 2019, they had about 700,000 cars. And now in 2022, with a lot of people traveling again, they only have about 424,000.  

[00:06:08.430] – Sean

So they’re trying to build up their inventory again. So if you’re traveling and you’re still having a hard time finding a car rental car, the reason is these companies are trying to rebuild their inventory, and it’s pretty difficult. So that’s why prices for rentals have gone up. Continuing on with some of the news is people are in a state right now with travel, even though we’re in a bear market and some would classify recession. They’re calling this revenge travel.  

[00:06:38.230] – Sean

A lot of people did not get to travel over COVID, essentially a one to two year time period. So now they’re trying to make up for it and traveling a lot. It’s actually the number one thing people are spending money on right now. I know there’s home renovations and home expenses have been hot too, but I found that really interesting. People do not care about this bear market recession.  

[00:07:00.760] – Sean

Unlike 2008, there’s a lot of fear. People stopped traveling. They stopped with spending. In this case, people are like, nope, I’m still getting out there. I’m going to travel.  

[00:07:09.340] – Sean

That’s a good sign for the economy, and it’s a good sign for companies like Hertz. I do want to point out that Hertz did buy, or they’re in the process here. They don’t have all their cars yet, but 100,000 Teslas. So if you go to Hurt, you cannot in all cities. But I did kind of do some shopping around to see where I could find a Tesla.  

[00:07:34.170] – Sean

For example, Chicago, you can rent a Tesla. And there are actually people who are renting, choosing to rent a Tesla, and they’re not even traveling. So it’s kind of like a tribe before you buy situation, which is creating another revenue stream for Hertz they didn’t really see coming. It’s pretty cool. So people go to these local, you know, let’s say your local rental location.  

[00:07:57.100] – Sean

Usually they’re at an airport. They just want to rent a car for like, two days, and they’re doing that just to try before you buy. Well, another company that they’re working with is Pollster, also electronic vehicles. They’ve committed to purchase $65,000. Same situation here.  

[00:08:12.060] – Sean

Pollster is a little more global. It’s not a popular car in the US. But same situation. People are they’re trying before they buy. They’re renting these cars without even traveling just to give it a test drive.  

[00:08:26.140] – Sean

All right, so let’s dive into the competition here. So you have Hertz, one of the big players out there. You also have avis. Just a quick comparison. Their score is 67 out of 100, compared to the 95.  

[00:08:39.030] – Sean

Margin of safety is 64. So still decent. They’re on sale, but not as strong as hers. So the problem we have with this business model really is the private rental companies. You’ve got Enterprise, Alamo, National Car, Dollar, Thrifty Car Rentals, Euro Car and the list goes on.  

[00:08:59.550] – Sean

There’s a lot. You go to an airport and when you exit the plane you’re walking through the terminal, you’re going to see a lot of these companies just lined up right next to each other and a lot of people are price shopping. So how does Hertz really stand apart from the competition? It’s tough in a business like this. You don’t want to race to the bottom and lower your prices.  

[00:09:21.880] – Sean

You do want to offer better cars, knowing that EVs are hot. The play with Tesla and Pollster, I think that is a good play, especially that they’re generating revenue from people just trying before they buy. But that is the issue with this business that I think a lot of people are not looking at is the competition. Yes, a lot of people are in this revenge travel mode right now, but how long will that sustain? That’s the big question.  

[00:09:48.190] – Sean

Now let’s jump to the management. This is where things not ideal. It’s good for the short term, but let’s dive in. So Steven sure is the current CEO of hertz. He’s been in place since February 2022 through Culver.  

[00:10:04.750] – Sean

There are a few CEOs I think tried and then left or were removed from the company. So it was a bit of turnover. He has 28 years of experience with Goldman Sachs before this, investment banking. So what? I feel like he was put in place to really help improve the financials of the company, not necessarily build a strong culture.  

[00:10:25.910] – Sean

So in this case, do I see share as a strong long term fit for the company? No, and I’ve seen this with other companies in the past. Is it going to bring in somebody that’s more financial minded, like let’s say, a contract CFO, if you will, that’s working at different public companies? They’re going to come in, they’re going to be the CEO, they’re going to be focused on that net income as well as the EPS to really get it back on track. But not always the best play for building a culture, getting that glass door rating pumped up.  

[00:10:59.590] – Sean

Speaking of in this case, you can’t reflect this back on sure, but the Hertz glass door rating is 3.2 out of five. It’s a bit lower than we’d like to see. We like to see 4.0 or higher. And then with the CEO rating, that was the previous CEO, the rating was I’m looking here was 57%. We like to see 80%.  

[00:11:20.140] – Sean

So we’ll see what Shira’s rating is, although I don’t see him staying at the company for too long. So in summary, with this company, I would say the margin of safety and meaning. The first two M look great, those boxes check, but the issues for me are the moat and the management way too many competitors. In this case, it would be a risk if I were putting this in my actual portfolio. I will say this.  

[00:11:49.320] – Sean

When the market does correct and a lot of stocks do start taking off, I think that Hertz is going to see some nice shortterm gains. If you’re into travel stocks, I would say it’s probably a stronger stock than the cruise stocks out there. But for a long term holds, I would probably look at other businesses just because of that motion and then the management. I do foresee a CEO change in the coming years. I don’t think sure it’s going to stick around for the long term.  

[00:12:18.700] – Sean

That’s just my gut feeling. But hopefully this review was helpful and I’d love to hear your feedback or recommend any other stocks you’d like me to review. Thanks.