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