Summary

  • The Hertz bankruptcy took a positive turn when the used car market got hot.
  • The company was able to emerge from Chapter 11 with a growth plan focused on electric vehicles and AI.
  • Is Hertz moving too fast for the market to keep up?

Bankruptcy seemed nigh impossible for most major publicly traded companies in 2020 and 2021 as unprecedented easy money policies kept cash flowing. Even Carnival Corp. (CCL) and the hydrocarbon exploration company Occidental Petroleum
OXY
Corp. (OXY), whose balance sheets were in shambles even before the pandemic abruptly cut their operations, managed to survive.

Yet one of the largest car rental companies in the United States, Hertz Global Holdings Inc. (HTZ, Financial), managed to find itself in Chapter 11, even though its main rivals Avis (CAR, Financial) and the private company Enterprise avoided the same fate thanks to better financial cushions.

Hertz emerged from bankruptcy court in mid-2021, and after an initial spike above the $30 mark, the market was lukewarm on the stock.

However, while the current negativity is certainly deserved, investors may be underestimating the company’s new lease of life after its big downfall. It wasn’t just a return to business as usual; Not only did Hertz learn a valuable lesson, but it also took a new direction of growth under the leadership of CEO Stephen Scherr. Hertz embraces electric vehicles and artificial intelligence, making it unique among American car rental companies. Could that make Hertz a promising turnaround opportunity, or will such aggressive investments send it straight back into insolvency?

From bankruptcy to 100,000 Teslas

In June 2021, the bankruptcy court approved Hertz’s reorganization plan, which included eliminating more than $5 billion in debt and providing more than $2.2 billion in liquidity to the reorganized company. Shareholders surprisingly received over $1 billion in value, when they were previously on the verge of being wiped out completely. For comparison, Hertz had a market cap of $5.83 billion at the time of writing.

Where does the money for such a solid restructuring plan come from? Luckily for Hertz, as it faced bankruptcy, the used car market suddenly got hot. The company has always used the money from the sale of its retired cars to pay off its creditors, but when the pandemic hit initially it found itself unable to secure a good price for them, which contributed to its bankruptcy. Semiconductor shortages and easy-money policies quickly turned the tide, and suddenly Hertz got top dollar for its used cars.

This is why the company was able to emerge from bankruptcy in the blink of an eye and even buy 100,000 electric vehicles from Tesla (TSLA, Financial) for the exorbitant sum of $4.22 billion, which makes vehicles about 20% of its entire fleet electric.

A growth strategy focused on electric vehicles and AI

Hertz’s electrification strategy does not stop there. Under Scherr, the former chief financial officer of Goldman Sachs (GS, Financial) who was named the company’s new CEO in February 2022, Hertz is making electric vehicles and artificial intelligence cornerstones of its plan. long-term.

According to Scherr, in addition to the Teslas, Hertz has also committed to adding 65,000 electric vehicles from Polestar (PSNY, Financial) and 175,000 from General Motors.
GM
(GM, Financial) to its fleet, with deliveries set to begin for the 2023 model year. The company aims to have 25% of its fleet electric by 2024.

To facilitate customer adoption of electric vehicles, Hertz also works with local governments when it comes to building charging infrastructure. For example, Hertz recently announced a partnership with the City of Denver to expand its electric vehicle charging infrastructure (with a focus on low-income and underserved areas) and provide tools and training citywide. . These resources will also provide assistance to Hertz customers who are driving an electric vehicle for the first time or need help locating a charger in an unfamiliar area. Hertz provides chargers through its partnership with BP Pulse, which is owned by oil giant BP (BP, Financial).

“Public-private partnerships are very powerful vehicles,” Scherr said in an interview with CNBC. “We see what happens in mobility, we see the direction of movement. And therefore, we can be a force with a very powerful city and mayor, to get things done in the way that I think we would all like to see, which is broad participation in electrification.

The other part of Hertz’s technological transformation is artificial intelligence. Major advances in artificial intelligence have made it incredibly valuable for certain parts of the car rental business. For example, there is no longer so much guesswork with the company trying to get its vehicles to different locations in order to meet demand, because technology can help understand where the demand is. Hertz is also testing artificial intelligence inspection technology that takes a 360-degree view of a car when you rent it and when you return it, which should help eliminate the debate (and associated costs) over who caused it. damage to a vehicle.

Valuation comparison

Hertz appears to be on an attractive growth path as one of the first big movers in the electric vehicle rental space. Of course, it’s not the first company to offer electric vehicle rental, but it’s the first household name to have an office in almost every airport in the country to do so on such a large scale.

Hertz’s existing scale in gas-powered car rental combined with its need to present a new growth story while emerging from bankruptcy created development that could have been much slower in coming if the company had managed to survive Covid without going bankrupt.

In terms of valuation, Hertz trades at a price-earnings ratio of 9.91, which seems low when taken out of context, but is higher than Avis’s price-earnings ratio of just 3.59. Thanks to maintaining a stronger balance sheet, Avis not only managed to survive the pandemic, but even achieved an incredible three-year earnings per share growth rate of 111%, while Hertz has only just regained its pre-pandemic levels.

While Avis is also in the process of adding more electric vehicles to its fleet, it has been much slower to do so compared to Hertz, taking a “wait and see” approach. In fact, it was the purchase of 100,000 Teslas by Hertz that prompted Avis to act on the electric vehicle front. CEO Joe Ferraro commented on the company’s third quarter 2021 earnings call, “You’ll see us going forward being much more active in electric scenarios as things evolve over time.”

In the long run, I think Hertz or Avis is the best value will depend on how quickly the auto market shifts to electric vehicles.

To take away

Hertz has done a great job of recovering from its bankruptcy. After receiving a surprise boost from the stronger used-car market, it has successfully launched its comeback in the public market by making huge investments in electric vehicles and artificial intelligence, which promise to improve efficiency and position it for long-term growth.

By 2022, only about 4% of North American auto production will be electric, which may make Avis’ slower adoption of electric vehicles seem like the most efficient path. However, Hertz isn’t just aiming to mimic the global market; it aims to capture demand to experience an electric vehicle without buying one and partner with cities to help them build charging infrastructure to improve drivability (and therefore create demand) .

As the transition to electric vehicles accelerates and some states and companies impose deadlines to go all-electric, Hertz looks poised to play a key role. Investors should, however, keep a close eye on its balance sheet, as poor balance sheet management could once again become a major risk.

Disclosures

I/we have no positions in the stocks mentioned and I do not intend to buy any new positions in the stocks mentioned in the next 72 hours.

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