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Hertz: A Spin-Off Away From Stock Gains?

The old “We Try Harder” advertising slogan belongs to Avis, famously the struggling No. 2 in car rental, and now known as Avis Budget Group (CAR). But the car rental player trying harder to catch up these days is Hertz (HTZ), the long-time No. 1, which has seen its stock languish over the past year.

HTZ Chart

HTZ data by YCharts

On a forward PE ratio basis, Hertz is getting no respect.

HTZ PE Ratio (Forward) Chart

HTZ PE Ratio (Forward) data by YCharts

Closing that gap could send Hertz shares up about $8 from their current perch of about $26. So, to encourage investors to think of it as more Avis-like, Hertz is spinning off its equipment rental business as a separate publicly traded company. That will make Hertz more of a pure play. The company announced its board’s approval of the spinoff plan last month.

The transaction – separating the equipment rental unit, which had 2013 revenue of about $1.54 billion, from Hertz’s domestic and international car rental operations, revenue of about $9.2 billion – may indeed give the combined stocks a pop. Wall Street loves a simple story and recent spinoffs have tended to perform well. Here are two sterling examples from their spinoff dates: TripAdvisor (TRIP) from Expedia (EXPE) and Fortune Brands Home & Security (FBHS) from Beam (BEAM), which is due to be acquired:

EXPE Chart

EXPE data by YCharts

BEAM Chart

BEAM data by YCharts

No guarantees, of course. But the best thing about the car rental business – if you’re an investor, at least – is a dramatic consolidation that reduced the industry’s roughly ten players down to three: Avis, Hertz and the privately held Enterprise. With fewer players, as with airlines, analysts expect an end to destructive price wars, relatively smaller fleets and higher utilization rates, and stronger pricing. All that means better returns; here we see operating margin.

HTZ Operating Margin (TTM) Chart

HTZ Operating Margin (TTM) data by YCharts

Still to early to tell. The economy’s improvement has likely been the biggest factor in the industry’s recovery.

HTZ Total Long Term Debt (Quarterly) Chart

HTZ Total Long Term Debt (Quarterly) data by YCharts

The spinoff could help Hertz reduce its large debt, a hangover from its days of private equity ownership. But even at Avis’s debt level, one sees that buying and selling hundreds of thousands of cars requires some borrowed money; Hertz held more than 700,000 cars in its car rental business at year end. Low rates have acted as a fabulous subsidy to the business. The players will need to extract bigger efficiencies from their newly-combined brands if they’re to prosper over the long haul. Unleash some financial advisor tools to learn more.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  spinoffs   stocks that look cheap   

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