Hertz Global Holdings rents cars and building equipment through its approximately 7,600 locations in nearly 145 countries.
[1] The company's Hertz car rental brand commands the biggest piece of the U.S. airport car rental market, with an estimated 28% share.
[2]. 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 approximately 72% 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.[3]
Furthermore, because the company purchases the majority of its 310,000 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.
Finally, given the nature of its capital intensive business, Hertz carries substantial debt ($12 billion as of FY 2006[4]). The company finances its vehicle inventory with asset-backed securities, and if Wall Street's appetite for these securities dissipates (which may be a consequence of the subprime crisis) or if interest rates rise, Hertz's ability to raise capital on good terms can be adversely affected.[5]
[edit] Financials
Below are some relevant financial metrics for the company, including a revenue breakdown and business mix breakdown. Most of the company's business comes from US airport car rentals, though its international segment, including operations in mature travel markets like Europe, are notably large.
The company experienced a sharp fall-off in operating income in 2006, largely as the result of taking out higher levels of debt and, thereby, incurring greater interest expense.
[edit] 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. The Hertz brand enjoys the largest market share and substantial brand recognition at airports.[6] 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.[7]
- 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.
- Demand for asset-backed securities determines the attractiveness of financing for the company's fleet The company generally finances its fleet of vehicles with substantial debt, often packaging and securitizing debt in the form of an asset-backed security using the fleet of financed cars as collateral. If Wall Street's appetite for these securities dissipated or if interest rates rose due to factors such as rating agency downgrades, collateral impairments, or credit insurer financial deterioration, Hertz's ability to raise capital on good terms can be adversely affected.[8] Furthermore, the company is already substantially indebted, with over $12 billion in debt on its balance sheet as of the end of FY 2006.[9] This heavy leverage places the company at greater risk of a perpetuating cycle of failing to meet debt covenants and therefore greater risk of not being able to raise more capital on favorable terms.
[edit] Competition
The auto and equipment rental industries are highly competitive. The company's main car rental competitors are Avis Budget Group (CAR), Dollar Thrifty Automotive Group (DTG), Vanguard Brands, and Enterprise Rent-a-Car (the latter two are privately held).[10]. 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.
The domestic auto rental industry is estimated at around $20 billion per year and includes nearly 2 million cars.[11] The industry tends to be consolidated in a few large players and then fragmented with several smaller companies with significantly less market share. Below is a comparison of relevant operating metrics for each of the major players in the auto rental industry.
| Company
| US Rev. 2006 ($M)[12]
| Domestic Fleet
| International Fleet
| Revenue/Domestic Car
| US Airport Market Share[13]
| Total US Market Share[14]
|
| Hertz (HTZ)
| $4,385
| 310,000
| 180,000
| $14,144.60
| 28.4%
| 18.4%
|
| Avis Budget Group (CAR)
| $4,109
| 329,350
| 53,310
| $12,476.09
| 30.3%
| 19.6%
|
| Vanguard Brands
| N/A
| 209,400
| N/A
| N/A
| 19.7%
| 12.4%
|
| Dollar Thrifty Automotive Group (DTG)
| $1,660
| 142,857
| N/A
| $11,620.01
| 11.6%
| 8.5%
|
| Enterprise Rent-a-Car
| $7,000
| 630,066
| 247,934
| $11,109.95
| 7.6%
| 37.4%
|
In the equipment rental business, the competition is intense, highly fragmented, and frequently price competitive.[15] HERC believes it is one of the preeminent rental operations in each of the market it competes in. Large competitors with comparable positions include:
[edit] Footnotes
- ↑ 2006 HTZ Annual Report, "Business," pg 5
- ↑ 2006 HTZ Annual Report, pg 17
- ↑ 2006 HTZ Annual Report, "Risk Factors," pg 29-30
- ↑ HTZ 2006 Annual Report, pg 102
- ↑ 2006 HTZ Annual Report, "Risk Factors," pg 34.
- ↑ 2006 HTZ Annual Report, pg 17
- ↑ HTZ 2006 Annual Report, "Risk Factors," pg 32-33
- ↑ 2006 HTZ Annual Report, "Risk Factors," pg 34.
- ↑ HTZ 2006 Annual Report, pg 102
- ↑ 2006 HTZ Annual Report, "Competition," pg 16
- ↑ Auto Rental News 2006 Report
- ↑ Figures compiled from company annual reports or, where not available, Auto Rental News estimates
- ↑ Data from HTZ 2006 Annual Report, "Competition," pg 17
- ↑ Data compiled from fleet sizes of Auto Rental News 2006 Report
- ↑ HTZ 2006 Annual Report, pg 6
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