a quick look at the financials of car-rental company Hertz (HTZ) , it’s hard to understand why a shareholder would be unhappy with the direction of the company. Year after year of expanding revenues and profits and a share price that has nearly tripled over the last five years would paint a favorable picture to the casual observer.
But, here’s the thing, investors tend to rely heavily on the information they get regarding both past profits and projections for the future. So when you start to present the possibility that neither of those numbers are reliable, it can tend to really upset those people relying on them.
Accounting Review to Revise Numbers Since 2011
Since March, Hertz has been struggling to get its finances straight for 2011 prior to splitting up its auto and construction equipment rental businesses. The issues in 2011 ripple through the following years, meaning all the numbers need to be revised.
The splitting of the businesses was announced last December while the company was attempting to enact a poison pill strategy to ward off activist investors that were circling after it was outpaced by rival Avis (CAR) for the year.
Now, Hertz is trying to get its books in order so that it can complete the split. The company cited non-fleet assets and dubious accounts in Brazil, among other things, as the source for its pain.
The split would separate the auto rental end of the business, which currently operates over 11,500 rental locations and generates annual sales in excess of $9 billion, and an equipment business that produces $1.5 billion a year through its 335 branches.
GM Recall Hits Hertz Hard, 2014 FY Guidance Withdrawn
As if having to sweat the reality of the numbers over the last three years wasn’t enough, Hertz made things a lot worse on August 19th when it withdrew its 2014 guidance. The company revealed that it had been hit particularly hard by GM (GM) recalls and saw significantly higher-than-expected, among other issues.
The stock was hit hard in early trading on August 20th. While the stock only lost 3.9% on the day, but that was after it recovered significantly from opening down over 11%. On the whole, shares are down 6.5% since the announcement.
Well Now You’ve Done It, You’ve Angered Carl Icahn
Rumor has it that if you say the words “activist investor” to a mirror three times in a row Carl Icahn appears and buys a 10% stake in your company. And, sure enough, swirling rumors that the options traffic that spooked Hertz into its poison pill in December turned out to be true.
Carl Icahn revealed that he had taken an 8.48% stake in Hertz on that very same day the markets were reacting to news that the company had pulled back its 2014 guidance. And guess what? Carl has some opinions on how the company should be run! Go figure.
That said, Icahn certainly isn’t alone. Pressure from activist investors has been building for some time and the recent issues with the accounting and this new lack of profits has ratcheted things up quite a bit. Most notably, everyone wants to see CEO Mark P. Frissora get the axe.
In addition to an Icahn statement saying he had “a lack of confidence in management,” August 20th (turns out, this was a VERY busy day for Hertz) also saw hedge fund Fir Tree Partners, themselves the owners of a 3.1% stake in the company, publicly call for a new CEO, saying in a statement:
“We are? quite puzzled to read Hertz’s? assertion that they ‘have a good handle on the nature and the scope of the issues’ given how many times the company has bungled forecasts in the last year and the shocking lack of financial statements. It made us wonder if we’d read the wrong company’s press statement. It’s clearly time to move past denial and swiftly to install great leadership for a great company like Hertz. We stand ready to help.”
And the company’s troubles may go deeper than just an accounting snafu and the GM recall. Morgan Stanley analyst Adam Jonas offered up more reasons for concern while cutting his price target from $20 to $19 on August 28th:
“The company has had a lot on its plate in recent years: expanding into the used car business, implementing new technology, and acquiring and integrating DTG. … we continue to see an alignment of new forces from within and outside of the traditional car rental ecosystem that can put significant pressure on the earnings power of Hertz and its industry peers. … Our valuation of Hertz shares suggests substantial downside from current levels. We recommend investors take advantage of the unique market conditions (near record high used car prices and constructive activist sentiment) to reduce exposure.”
What’s the Future of Hertz and Frissora?
So this can’t be a good couple of weeks for Frissora who, as Chairman and CEO, has most likely seen his portfolio take a big hit as well as being pilloried in the press by his shareholders. However, while Adam Jonas did recommend, in so many words, cutting and running from Hertz stock, he also expressed some confidence in Frissora:
“While there have clearly been challenges, to which the company is openly admitting, we are confident that many of the integration issues are short-term in nature and that Hertz management, led by Chairman and CEO Mark Frissora, will succeed in overcoming these short term issues.”
What’s more, he pointed out that the car rental business is a fickle one that is prone to pretty big swings.
“We continue to view car rental as a highly cyclical business,” Jonas wrote. “In a great year, we believe it is possible for Hertz to achieve an EPS in the $3 range (based on current share count). In a bad year, we believe losses are possible (even excluding 1-time restructuring expenses). In a normal year, we see Hertz´s earnings power at around $1.50 per share.”
So, the future of Hertz remains as unclear as, well, Hertz’s past does to its accountants at the moment. The sharks are certainly circling right now, but Frissora appears more than capable of surviving and bouncing back if a few things break his way. Particularly, if the plan for splitting their auto and construction equipment businesses comes to fruition and proves a success, it’s likely that Fir Tree and Icahn may not have as much to say.
That said, Frissora may not have much space for another misstep at the moment.
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