Hertz Global Holdings Inc. HTZ S
December 15, 2008 - 5:32pm EST by
grumpy922
2008 2009
Price: 3.26 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,052 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT
Borrow Cost: NA

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Description

Why I think HTZ  will head to zero in 2009:

1) Due to the recession I assume business and vacation travel is going be down significantly YoY for every quarter through at least 4Q09. At debt/assets of 85% I doubt they can make it through a severe recession.

2) The value of the $2.9B of equity is at risk due to incorrect depreciation rates on assets soon to be sold – HTZ is basically in the used car futures market on a balance sheet basis as they buy cars (Fords!) at par, drive ‘em for 18 months and then sell them at auction. Prices were already under pressure (Manheim used car YoY index just hit a new low of -12%) and now the buyers (dealers) are getting creamed as well. HTZ has $8.6B worth of cars depreciated by 11% to $7.6B. About 2/3 of the auto fleet is considered to be not part of the ‘at-risk’ fleet. Why? Because Ford has promised to buy back the cars at set prices. Want to bet that either a pre-packaged bankruptcy or a restructuring ‘car czar’ would demand an adjustment to the repurchase price in 2009? But sale price of the 1/3 ‘at-risk’ fleet certainly will be lower than expected and these losses will flow through the P&L.

3) Things could actually be even worse on this metric at Herc (equipment rental – 1/3 of HTZ) which has $3B of equipment depreciated by 12% and depreciation rates here were decreased in ’06 and ’07! The easy conclusion here is that the depreciation rate was likely too low for assets that actually will be sold in the next couple of years.

4) Worried yet? How about the $4B of Goodwill and other intangible assets? Yup – you’re right, HTZ has negative tangible equity. Just the ‘value’ of the name ‘Hertz’ is equal to equity value. The next intangible test is 4Q08 for data as of 10/1/08 (this may allow HTZ to get away with no write-down until ’09 but the auditors may not agree).

5) Don’t forget about the Pension Plan – it was underfunded by $150M at the end of ’07 – it must be 2X that now as 70% of the plan assets are in equities. This is an old plan and for the next 4 year the cash payout is $27M a year on a plan funded with $330M in assets on 12/31/07 – in other words, the plan will have to be ‘topped up’ very quickly with real money.

6) Cash is going to get tight – in ’07 cash flow from operations was $3B but -2.3B from investment activities (mostly net of buying/selling cars and rental equipment) and - $700M from financing (mostly servicing of long term debt). So the company will have to hope it can cut costs by more than the drop in operating revenues and what it gleans from selling used fall. Cash on the balance sheet was less than 4% of assets so there isn’t a lot of wiggle room here.

7) Even if points 2-6 simply do not come to pass at least the Sell-side is out to lunch and estimates are way behind the curve. Revenues were $8.1B in ’06, $8.7B in ’07 and … expected to be $8.7B in ’08 and $8.3B in ’09. Think about this quarter - 9M08 revenues were $6.7B and 4Q07 was $2.1B and so consensus for 4q08 of $2B only expects a drop of 5% YoY for the quarter. Clearly the auto/equipment rental market is more than 5% weaker now that it was in the 4Q last year. My bet is that the quarter comes in closer to $1.7B for top line and EPS is negative. The ’09 numbers are even worse – 30% of HTZ revenue are non-US and with the strength of the US$ YoY one could easily see currency cause the entire 5% expected drop in revenues for HTZ next year. Now bring on the recession where I assume quarterly compares should be down 10-20% YoY. That gets me to revenues of $7.2B to $6.4B. (This is using -5% for currency on my ’07 estimate and then down 10% to 20% from that). So the Street is likely 15-25% too high for the top line.

8) So if we use $6.4B-$7.2B for ’09 and use flat LTM expenses of $8.7B we get a tax adjusted loss of $1.1B to 1.7B. Clearly costs will come down a bit (though this is basically a fixed cost business) but then throw in some negative adjustments for depreciation rates that were too low and pension adjustments and a loss of $1B loss starts to sound reasonable. $1B represents a loss of $3 in EPS which is about the current share price. So while with the stock on 7X ’09 Street consensus of $0.51 investors aren’t even that skeptical of estimates as of yet as the P/E is in line with many banks and leasing firms. I don’t see how the stock doesn’t go down with actual results moving from solid profits to large losses.
 
9) I doubt the government will help out HTZ. Obama can't save every company in the country and service industries with geographically dispersed work forces will likely be at the bottom of the list. Were HTZ to file for Chapter 11 the company would still reopen, the jobs would remain, and likely the debt holders would be crammed down and equity wiped out through DIP financing.
 
Borrow on the stock is normal rebate. Of eight analysts who cover HTZ, there are a couple of buys and no sells. No analyst has HTZ making a loss in ’09.
 
 Regards, Grumpy

Catalyst

1) Estimates for profit in '09 are likely much too high and a loss is likely
2) depreciation rates have been too high in recent years and will lead to losses
3) restructuring of Big # automakers could lead to large losses to HTZ if Ford refuses to buy back program cars as promised
4) Government unlikely to bail out HTZ. Obama can't save every company in the country and service industries with geographically dispersed work forces will likely be at the bottom of the list
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