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Hertz Global Holdings (HTZ) |
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WIKI ANALYSIS
Hertz Global Holdings (NYSE: HTZ) is the world's largest worldwide airport general car rental brand, based on revenues.[1] The company rents cars and building equipment through its approximately 8,100 locations in approximately 145 countries. It is the only car rental company in all major European markets as well as the United States.[1] It is also the market share leader in airport car rental business by revenues.
The company's Hertz car rental brand commands the biggest piece of the U.S. airport car rental market, with an estimated 28% share. Through its HERC subsidiary, the company rents equipment ranging from earthmoving vehicles, material handling equipment, aerial and electrical devices, air compressors, pumps, generators, and more to primarily builders of non-residential property.
With the vast majority of its business derived from airport business across the globe, the company is highly dependent on the airline travel industry. Disruptions or shifts in travel, including terrorism, recessions or drops in disposable income leading to decreased vacationing and business travel can dramatically affect the financial results of the company.
Furthermore, because the company purchases the majority of its cars under special repurchase or guaranteed depreciation programs (whereby they can sell vehicles back to the manufacturers at a certain price) with Ford Motor Company (F) and General Motors (GM), they are subject to risks related to these manufacturers' financial troubles.
Financials
For 2009, Hertz posted total revenues of $7.1 billion, a substantial decrease from its 2008 revenues of $8.5 billion.[2] Despite this decrease in revenues, Hertz was able to decrease its net loss from $1.2 billion in 2008 to just $111 million in 2009. Most of this was a result of Hertz incurring a one time impairment charge of $1.16 billion in 2008.[2]
Business Segments
Hertz breaks its operations into two reportable segments: i) Car Rental, and ii) Equipment Rental.
Car Rental (82.4% of 2009 Revenues)
The car rental segment is the segment that rents out cars that Hertz either owns or leases. In 2009, roughly 67% of its total worldwide car rental revenues came from airport locations.[3] In 2009, this segment earned $6.0 billion in total revenues.[4]
Low cost services Europe
In Europe the 85% of tourist travel in low cost airlines and rent the cheapest offer. Low cost rental companies are growing very fast thanks to the promotions 30% of discounts in average. They can make money with such prices adjusting structure costs, outsourcing everything and small sales network being just in best airports.
Equipment Rental (17.6% of 2009 Revenues)
Hertz operates its equipment rental segment under its HERC subsidiary. HERC is one of the largest equipment rental companies in the United States, and it rents a broad range of earthmoving equipment, materials handling equipment, aerial and electric equipment, among others.[3] In 2009, this segment posted total sales of $1.1 billion.[4]
Trends and Drivers
Airline Travel
Over 70% of the company's car rental business comes from airline travelers who rent vehicles upon reaching their airport destination. This benefits Hertz, as its brand has the largest market share and substantial brand recognition at airports. During periods of heavy traveling and vacationing, the company benefits from the tailwinds of increased traffic at its airport locations. Conversely, disruptions to travel, including terrorist attacks, natural disasters, or recessions (during which consumers and businesses cut spending on non-essential travel and vacation) adversely affect the company's bread-and-butter car rental business.
Problems associated with domestic auto manufacturers
The majority of the company's rental vehicles are purchased from Ford Motor Company (F) and General Motors (GM). Hertz typically enters into repurchase or guaranteed depreciation programs with these manufacturers, in which they can sell vehicles back to the manufacturers at a certain price for the car after a certain period of use. The arrangements mitigate the risk that the value of the cars after the company is through using them falls below expected levels (i.e. "residual risk"). But the continuation and success of these arrangements depends on the ability of the manufacturers to pay their obligations when the company wishes to sell back vehicles. They also depend on the ability of the manufacturers to be financial willing and able to offer vehicles on terms with low residual risk. Because these companies have been struggling with credit problems and operating deterioration, Hertz faces the trickle-down risk of these firms' continued troubles.
Rising oil prices
An increase in fuel prices has two adverse effects on the company. First, it directly discourage use of rental cars, since customers must fill the tank during the period they rent the vehicle. Second, it leads to drops in airline travel, which, as mentioned above, is a driving force of the company's business. Because the rental industry is so price competitive and because drivers will avoid frequent travel and driving given high oil prices, passing costs on to customers is difficult to impossible.
Non-residential construction levels
Hertz's equipment rental subsidiary, HERC, is dependent upon non-residential/commercial construction activity. Its product mix includes machinery and equipment that is largely used during construction activities. Drops in non-residential construction will hamper results at HERC as fewer construction projects means less demand for equipment rentals from Hertz. To a lesser degree, the recent declines in the U.S. housing market and in new home construction might put strain on HERC's business, though not as many residential projects use HERC's equipment.
Competition
The auto and equipment rental industries are highly competitive. The company's main car rental competitors are Avis Budget Group (CAR), Vanguard Brands, and Enterprise Rent-a-Car (the latter two are privately held). Generally, the company competes primarily with Avis and Dollar Thrifty for airline-related rental business, while Enterprise, which sports a larger car fleet and higher revenues, focuses more on off-airport business, including "loaners" and other travel.
In the equipment rental business, the competition is intense, highly fragmented, and frequently price competitive. HERC believes it is one of the preeminent rental operations in each of the market it competes in. Large competitors with comparable positions include:
- United Rentals (URI)
- RSC Equipment Rental
- Sunbelt Rentals
- Home Depot (HD) Rental
- NES Rental
Trends and Forces
Acquisition of Dollar-Thrifty
In September, 2010 Hertz (NYSE: HTZ) closed a deal to buy smaller car rental company and former competitor Dollar-Thrifty (NYSE: DTG). It managed to keep Dollar away from Avis (NYSE: CAR) which had topped Hertz’s earlier bid. Hertz new offer is for $43.60 cash plus 0.6366 a share for each share of Dollar Thrifty. The new offer adds $10.80 a share of cash to the deal price. This is deemed by the Dollar board to be better than the Avis $40.75 cash and 0.6543 per share incentive.[5]
References
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