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Puttin' on the Hertz



November 05, 2013 – Comments (5) | RELATED TICKERS: HTZ , CAR

HTZ is a company that is not much like other companies I like to invest in.  Everyone knows about its black and yellow logo, and its rental cars - that's the kind of thing I like, a long-standing American brand.

But it was recently - 2005 -taken private by private equity, sliced to the bone, reorg'd, then spun public again about a year later with a huge debt load - you know how private equity likes to do.

Since then, it's performed well, paying its debt down, refinancing, turning a handsome profit every quarter, beating Street expectations more than half the time, showing nice consistent EPS growth.  And they've modernized their IT to the point that it's almost inconceivable - they know where every car is, all the time; and, more, they know where it ought to be to generate max revenue.  And they use that data to make day-to-day operational decisions and year-to-year corporate decisions.  I've been renting a lot of cars in the last year, in a variety of places across the country; they always seem to have the car I need, and it always seems to be the last car on the lot, and that's just amazing to me.  Their higher end cars even come with a special proprietary HTZ GPS system, and of course SIRI satellite radio, which is something I enjoy on long drives.  They're getting their customer experience right - and eking out a little more on every receipt I pay for, too.

During that time, there's also been tremendous consolidation in the rental car market.  HTZ most recently acquired Dollar Thrifty; just before that, Avis acquired Enterprise in something that was more of a merger than an outright acquisition.  Avis has not modernized their IT the same way HTZ has done, that's very evident from the customer side; the task still lies before them and it's reflected in their margins.  You have heard about the new way of renting cars, Zipcar and carsharing and etc; you probably didn't know that these two companies control most of it now.  In fact, Avis acquired Zipcar earlier this year.  Basically car rental is now cola; you can have Coke, Pepsi, or a third option; the third option can't compete due to economies of scale and either goes out of business or gets acquired (you listening, Jones Soda?)

Hertz has also entered a related market; their fleet must be disposed of and renewed on a rolling basis every couple of years, so they're now into retail car sales: car lots, salesmen, online guaranteed pricing, etc.  The whole operation appears to be IT-driven and it's making them profits they used to hand over to middlemen like CarMax. 

HTZ just delivered an earnings beat and guided for no change in their 2013 guidance.  After cutting 5% from the share price over the last couple months, the Street today treated the share price to another 15% haircut.

HTZ's margins are pretty thin and I understand why a whisper about higher fleet provisioning costs might alarm investors, especially with the giant debt load that HTZ is shouldering.  But looked at another way: US people and US companies need to rent cars and there are now two options, and HTZ, which is now everywhere after their recent acquisition, is significantly better than its competitor in terms of operations.  That makes the company best of breed.  And debt doesn't last forever.

I think the haircut was overdone and I re-upped here - looking long-term, as I usually do.  Anyone have any thoughts on this company or industry? 

5 Comments – Post Your Own

#1) On November 05, 2013 at 12:30 PM, ikkyu2 (99.26) wrote:

I'd particularly enjoy a comment on its debt structure, if anyone knows.  I don't have access to good information on that like I used to.

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#2) On November 05, 2013 at 12:54 PM, ikkyu2 (99.26) wrote:

I find that a lot of the HTZ debt is not the usual kind of corporate debt; rather, it's collateralized by the car fleet.  Makes sense that they would not want to purchase cars outright for their full value when they only keep them 2 years.  Would still like more clarity if anyone has any.

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#3) On November 05, 2013 at 9:36 PM, Mega (99.95) wrote:

"just before that, Avis acquired Enterprise in something that was more of a merger than an outright acquisition."

Actually Enterprise is private, and is the largest and best run of the 3 companies.  

Have you read the Hertz presentation that won the Pershing Square stock pitch award? 


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#4) On November 06, 2013 at 1:38 AM, ikkyu2 (99.26) wrote:

Avis acquired Budget, not Enterprise.  Sorry about the brainfart.


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#5) On November 06, 2013 at 1:45 AM, ikkyu2 (99.26) wrote:

Thanks for that link, MegaShort.  I hadn't realized Enterprise had so much share.  I've not been very impressed in my dealings with them, nor Alamo and National.

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