This Is Just The Beginning Of Troubles For Hertz (NYSE:HTZ)

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Hertz Global Holdings, Inc.’s (HTZ) share price declined by 24% in post-market trading on May 4, driven by bankruptcy fears that emerged after the Wall Street Journal reported the company has hired a restructuring expert. The company has been struggling for a while, and the fact that the company is now facing bankruptcy does not come as a surprise. The growth of ride-hailing companies such as Uber Technologies, Inc. (UBER), and Lyft, Inc. (LYFT) was already proving to be a massive headwind, and then came COVID-19. The thesis of Hertz bulls was centered on the fact that the company will eventually grow its earnings by renting its vehicles to Uber and Lyft drivers. This thesis, however, suddenly seems broken. It would be very tempting to buy Hertz shares at these depressed prices, especially with the hopes for recovery when business activities return to normalcy when mobility restrictions are lifted. However, Hertz will continue to face difficulties and the best thing to do is to avoid Hertz at any cost.

The things we know about Hertz’s liquidity position

At the time of writing this article, Hertz is yet to confirm the news circulated by the WSJ and Bloomberg last evening. According to the reports, Hertz was preparing to file for bankruptcy if the company failed to get its lenders to extend a grace period on a missed payment. This missed payment is related to the lease facility obtained by the company to finance its fleet of vehicles. As reported by the New York Post, Hertz was supposed to come up with $500 million on May 4 to avoid defaulting on its lease payment obligations or obtain a waiver from its lenders. The failure to make either one of these things happen would mean Hertz having to file for bankruptcy.

Renting cars to Uber and Lyft drivers might not be as sustainable as investors believe

When life gives you lemons, make lemonade. That’s a life lesson Hertz has been following for many years now. The growth of ridesharing platforms such as Uber and Lyft was seen as a major obstacle for rent-a-car companies. However, Hertz was quick to identify a lucrative business opportunity in renting cars to wannabe Uber and Lyft drivers who did not own a vehicle.

There are two major threats to the continued success of Hertz as a provider of vehicles for drivers.

  1. According to Uber, owning a vehicle outright is the best way to maximize earnings as this leads to a drastic drop in weekly costs. Therefore, it’s reasonable to believe that drivers who start their journey by renting a vehicle from Hertz are unlikely to stay with Hertz for a long period of time. Ridesharing companies are aggressively partnering with banks and other financial institutions to provide better financing options for their partnering drivers as well.
  2. There are many testimonials confirming that renting from Hertz is not as attractive as it sounds. The costs eventually add up and some drivers have found it difficult to break even. This is not a positive development for Hertz. Reducing rental rates is also not a viable option as it would lead to margin contraction.

When these factors are taken into consideration, it’s easy to see why betting on Hertz’s recovery is very risky.

The core business activity of Hertz will not be spared either

After reading a few articles on Seeking Alpha and elsewhere, I found out that investors are betting on car rental companies to thrive in the future as most rentals are needed for days or weeks, not just to go from point A to point B, which is the market dominated by ridesharing companies. Once again, I see this thesis as one that is broken.

Lyft recently introduced Lyft Rentals and this marks the beginning of an era where car rentals would be dominated by the same companies making hay in the ridesharing industry. Uber has been serving many international markets with its Uber Hire service where a customer is able to rent a car without a driver. There’s no paperwork involved and renting a car is as easy as hailing a cab through the mobile apps of these players. In addition to these global leaders of the industry, smaller players in Asian countries have already introduced similar services. None of this is good news for Hertz. The primary business activity of the company will come under massive pressure in the next few years, and this could even push Hertz out of business.

Don’t catch this falling knife just because of Carl Icahn’s presence

While I was scrolling through Stocktwits and Twitter yesterday, I noticed that many investors believe Icahn will eventually turn around the company by using some sort of magic wand. Carl Icahn is one of the most successful activist investors the world has seen in the last 3 decades and there’s no denying that. However, he has made mistakes in the past and he will continue to do so in the future as well. No investor can escape from this reality. Think about his $191 million investment in Blockbuster in 2004. Here’s a chart that tells you how well (or not) he did with this investment.

Source: Business Insider

This is what Icahn had to say about his investment in Blockbuster and why the company failed.

Blockbuster turned out to be the worst investment I ever made. It failed because of too much debt and changes in the industry. It had too many stores, Netflix created a better business model, and then Redbox kiosks and the whole digital phenomenon eliminated the need for consumers to go to a separate DVD store.

The situation facing Hertz has stark similarities to what happened with Blockbuster. Hertz is getting ripped off as a result of dynamic changes in the industry, and the century-old business model of the company suddenly seems too old to thrive.

Takeaway: bankrupt or not, Hertz is not an attractive investment

There is an immediate threat of bankruptcy for Hertz. Investors have to wait and see whether this risk materializes. Even if the company gets out of this scare with no collateral damage, what the future holds for Hertz is not promising. The sustainability of its business of renting vehicles to Uber and Lyft drivers is questionable, and its car rental segment will be in an uphill battle to survive. If Hertz survives this time, there is going to be another time soon. If I am to summarize my thesis for Hertz with terms that are highly popular these days, I’d say investors need to practice “social distancing” with Hertz shares.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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