On Monday, JPMorgan downgraded Hertz Global Holdings (OTC:HTZGQ), Inc. (NASDAQ:HTZ) stock from Neutral to Underweight, citing concerns over travel trends, fleet depreciation, and potential litigation costs. The firm also removed its previous price target for Hertz, pointing to the high financial leverage of the company and the uncertain outlook for used vehicle prices.
According to the analyst, the downgrade reflects lower earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates, with a forecast of $325 million in 2025, down from the prior estimate of $425 million. This adjustment implies a valuation lower than the previously set December 2024 price target of $5. The company's longer path to normalized earnings is now expected to extend beyond 2026.
The removal of the price target is also indicative of the "increasingly option value" of Hertz shares, which are highly sensitive to the unpredictable trends in used vehicle prices. The analyst noted that Hertz could face a capital call or a need to reduce its vehicle fleet if used vehicle residual values decline more than expected, which would reduce earnings potential.
On the flip side, inflation could benefit Hertz if it positively affects the $15.4 billion value of revenue-earning equipment on its balance sheet. However, Hertz may also need to pay $272 million in make-whole premiums and post-petition interest following a US Court of Appeals for the Third Circuit ruling in September, an outcome that was not previously factored into valuation analyses.
The rental car industry dynamics remain mixed, with softer travel metrics potentially impacting volume and pricing. Despite this, the Manheim Index, a measure of used vehicle prices, unexpectedly rose by 0.9% sequentially in the third quarter, which could benefit Avis Budget Group, Inc. (NASDAQ:CAR), a company JPMorgan continues to rate Overweight.
The analyst concluded that Avis is better positioned than Hertz to weather potential downturns in the used vehicle market, with more cushion against vehicle value declines and the ability to generate positive free cash flow in the next 12-18 months, unlike Hertz, which may struggle due to higher fleet costs.
In other recent news, Hertz Global Holdings reported Q2 revenues of $2.4 billion and an adjusted corporate EBITDA loss of $460 million. The company continues to maintain a strong liquidity position with $1.8 billion available at the end of Q2.
Hertz has faced challenges with its electric vehicle initiative, resulting in losses exceeding $500 million, as reported by JPMorgan. The company has also appointed Lauren Fritts as its new Senior Vice President and Chief Communications Officer, and expanded its Board of Directors with the addition of former Home Depot (NYSE:HD) CEO, Mr. Francis "Frank" Blake, and Ms. Lucy Clark Dougherty from Polaris (NYSE:PII) Inc.
In response to these developments, both Morgan Stanley and JPMorgan have revised their price targets on Hertz Global, with Morgan Stanley lowering its price target to $7.00 and JPMorgan reducing its price target from $6.00 to $5.00. Barclays has initiated coverage on Hertz Global stock, assigning it an Underweight rating and setting a price target of $3.00. These are some of the recent developments for Hertz Global Holdings.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Hertz's financial situation, aligning with JPMorgan's concerns. The company's market capitalization stands at $996.15 million, reflecting the market's current valuation of the firm. Hertz's revenue for the last twelve months as of Q2 2024 was $9.32 billion, with a modest growth of 3.38%. However, the company's profitability metrics paint a challenging picture.
InvestingPro Tips highlight that Hertz "operates with a significant debt burden" and "may have trouble making interest payments on debt." These insights corroborate JPMorgan's concerns about the company's high financial leverage. Moreover, the tip that Hertz is "quickly burning through cash" aligns with the analyst's worries about potential capital calls or fleet reductions.
The company's Price to Book ratio of 0.51 suggests that the stock is trading below its book value, which could be seen as undervalued or indicative of underlying issues. This metric ties in with the InvestingPro Tip that Hertz is "trading at a low Price / Book multiple."
For investors seeking a more comprehensive analysis, InvestingPro offers 15 additional tips for Hertz, providing a deeper understanding of the company's financial health and market position.
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