15 Sep

Carl Icahn Says Hertz Undervalued. We Agree.


Events Precipitating ALERT to HTZ

On June 6, Wall Street was hit with news that Hertz Holdings (HTZ) had been filing inaccurate quarterly reports with the Securities and Exchange Commission (SEC) since 2011, resulting in nearly a 15 percent drop in the share price from the year-to-date high of $30.50 – which had been achieved within 24 hours of the company’s news release.

Hertz stated in a SEC Form 8-K that it will restate three years of quarterly reports after discovering accounting errors regarding “non-fleet” assets and other entries.  The company added, “During the preparation of the First Quarter [fiscal 2014] 10-Q, errors were identified relating to Hertz’s conclusions regarding the capitalization and timing of depreciation for certain non-fleet assets, allowances for doubtful accounts in Brazil, as well as other items.”  The company also stated that financial reports for 2011, 2012 and 2013 will be restated.

Hertz has since stopped reporting financial results until the completion of the re-audit of the company’s books.

Following the Jun. 6 announcement, the next five trading sessions resulted in HTZ trading as low as $26, wiping out four of the five dollars that had been gained during the impressive rally that began in early February.

On August 20, HTZ whipsawed traders during a 11% move higher from an initial opening plunge.  Hertz had stated in an after-the-close news release of August 19 that the company was retracting its earnings guidance (in March) because of “operational challenges,” and that stockholders should expect earnings to result “well below the low end of its 2014 guidance.”  Back-to-back downgrades from JP Morgan and Deutsche Bank added to the avalanche of bad news for Hertz during the day’s trading.

JP Morgan stated:

We are downgrading our rating on HTZ to Neutral from Overweight following the company’s 8-K filing last night. The filing contained a bundle of bad news that we believe will be the point of capitulation for many of the frustrated bulls who have been extremely patient with HTZ until this point (as it has yet to print 1Q & 2Q results due to its financial statement review that began in May 2014).

In the 8-K HTZ announced 1) it is withdrawing its 2014 guidance (and will be well below the low end of its previous guidance); 2) 2Q14 headline results were lackluster with revenues coming in below our/Street’s estimates; 3) its Rental Car Group President and Lead Independent Director retired; and 4) it potentially delayed the spin of its equipment rental business past 1Q15 (a major catalyst for investors looking for the rental car business recapitalization).

We, and believe many of the bulls, have lower confidence in HTZ’s ability to manage through the accounting/financial statement review while concurrently participating in the rental car operating fundamental upswing that its primary competitor CAR has seen to date.

While traders were digesting the announcement regarding the amended guidance as well as the subsequent high-profile Wall Street downgrades, news of Carl Icahn’s SEC 13D filing hit the wire.  The 13D revealed that, since June, the ‘activist investor’ had accumulated 38.87 million shares, or 8.48%, of the outstanding shares of HTZ, sending the bears quickly scurrying for the exits during the ferocious buying and short-covering.  From the opening price of $27.47, HTZ soared as high as $30.95 on the news of Icahn’s stake in Hertz.

Contained in the 13D filing, Icahn noted that his discussions with Hertz management will center on “shareholder value, accounting issues, operational failures, underperformance relative to peers, and a lack of confidence in management.”  If necessary, Icahn also stated that he would seek shareholder representation on the Hertz board of directors.

On September 8, CEO Mark Frissora announced that he was stepping down.  The company stated that Brian P. MacDonald, president and CEO of Hertz Equipment Rental Corp., will serve as interim CEO.  The 47-year-old MacDonald has managed two turnarounds, one at Sunoco, Inc. and another at Isuzu Motors, Limited.

On September 11, news that three Hertz board of directors were resigning to make room for Icahn associates Vincent J. Intrieri, Samuel Merksamer and Daniel A. Ninivaggi brought in buyers of HTZ at the stocks’ 200-day moving average.


As part of the agreement with Hertz, Icahn said he would not initiate a proxy vote at the annual shareholders meeting in 2015, and would vote favorably to the present cast of board members during the meeting.

News of a relatively easy infusion of ‘new blood’ at Hertz, with the resignation of Frissora and installation of three of Icahn’s associates indicates to us that the transition to a better operational performance of the company may run more smoothly than initially handicapped during the subsequent weeks of the announcement of Icahn’s stake in Hertz of Aug. 20.

Analysis of Events and Expected Outcome

Betting on a turnaround of the Western world’s most-recognized name in auto rentals comes with some risk.   However, the issues confronting management’s turnaround are very ‘fixable’, in our opinion.

Accounting issues with the company’s SEC filings will ultimately be resolved; the costs to Hertz are not now known, but these costs and delays to the company’s plans to separate its equipment rental business are already fully factored-in to the share price, in our opinion.  Expansion of Hertz’s off-airport rental business and other initiatives won’t be materially affected.

Icahn’s avoidance of a proxy battle is good news for stockholders.  Contentious disagreements at the board of directors level can hurt the share price, as investors’ confidence during a time of needed focus in the boardroom erodes along with the leadership’s ability to execute a well-coordinated turnaround plan.

During the past five-year period, Hertz has grown its top line by a 4.9% CAGR, EBITDA at 5.9% and book value by 5.8%.  The company’s stock trades at a price-to-sales ratio of 1.15, which is nearly half of Hertz’s most comparable competitor’s ratio, United Rentals’ (URI) 2.13.  With the industry average of 1.87 and United Rental’s upper-bound reading of 2.13, Hertz’s strong brand recognition and market share affords the company a potential stock price range of as high as $45.25 to $51.50 under favorable circumstances.

It’s not a surprise to us, too, that, during the second quarter, mega-investors Larry Robbins, Joel Greenblatt and George Soros have also taken meaningful stakes in HTZ for, what we suspect are, reasons akin to Carl Icahn and ours.  A return to ‘normalcy’ at Hertz suggests that today’s sub-$30 share price could be undervalued by as much as 45%, with a time line ending by the close of fiscal 2015 (without regard to significant macro events).

The ‘Icahn Lift’

“My investment philosophy, generally, with exceptions, is to buy something when no one wants it,” Icahn once said.  As a ‘contrarian’ investor Icahn identifies mismanaged companies with accompanying poor stock performances.  He, then, sets out to ‘fix’ the problem and restore stockholder value.  This usually includes replacing key managers, selling parts of the company, cutting costs and initiating stock buyback programs.

From 1996 through mid-2004, Icahn had returned 53% per year, according to a Bloomberg report.

Hertz’s hurdles to full valuation align rather well with Icahn’s modus operandi and successful experiences.  The unusual number of automobile recalls are exogenous variables to the company’s profitability, but operational failures are not.  Car Icahn intends to ‘fix’ Hertz.  In essence, a bet on HTZ is a bet that Carl Icahn will once again restore Hertz’s value to stockholders.  Odds of success are quite high.

About Hertz Holdings

Hertz operates its car rental business through the Hertz, Dollar, Thrifty and Firefly brands from approximately 11,555 corporate and licensee locations in approximately 145 countries in North America, Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand. Hertz is the largest worldwide airport general use car rental brand, operating from approximately 10,090 corporate and licensee locations in approximately 145 countries. Our Dollar and Thrifty brands have approximately 1,400 corporate and franchise locations in approximately 75 countries. Hertz is the number one airport car rental brand in the U.S. and at 130 major airports in Europe.

1 Comment

  1. Rick

    As a former TWA employee I am following this advice even though the name Carl Icahn is like nails on a chalkboard in my home. Thank you for the detailed article Jason!


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