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Greenback Securities This report is published for educational purposes only by
students competing in Fordham University Equity
Research Competition.
Date: January 3, 2015
Industry: Rental And Leasing
LETS GET THE ENGINES STARTED………
We issue a Buy recommendation on Hertz with a one-year target price of
$35.42 using the Discounted Free Cash Flow to Firm Method. This offers
a 41.57% increase from its closing price of $ 25.02 on Jan 2th, 2015.
Year Revenue EBITDA EBIT PAT EPS P.E
2012A 9,025 3,416 1,175 243 0.54 46x
2013A 10,772 4,151 1,501 346 0.77 32x
2014P 11,689 4,138 1,145 409 0.91 27x
2015P 12,574 4,460 1,241 472 1.05 23x
2016P 13,645 4,851 1,357 559 1.25 20x
2017P 14,828 5,283 1,486 645 1.44 17x
2018P 16,133 5,760 1,629 774 1.73 14x
Main growth drivers include:
Recovering economic condition in the U.S that fosters the Airline
industry, directly and positively impacting Hertz’s main business
segment – Car rentals
Increasing internal revenue drivers due to synergy with China Auto
Rental and Dollar Thrifty Automotive Group
Increasing operational efficiency from management with cost
reduction
The promising spin off of Hertz’s equipment rental business
Main risk include:
Residual risk
Reduction in the levels of airline passenger travel
Increase in Car-Sharing Rentals (Zipcar)
Hertz Share Price Data
19
21
23
25
27
29
31
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15
Ticker: NYSE: HTZ Recommendation: Buy
Price: 25.02 (Jan 2, 2014) Target Price:$35.42
Time Horizon: One Year
HERTZ GLOBAL HOLDINGS (‘HERTZ’)
Market Profile
Closing Price (USD) 25.02
52-Week Range 31.6-18.5
Share Outstandings (M) 447.7
Market Cap (M) 11,201
P/E 27
EV/EBITDA 5.85x
Source: Yahoo Finance, Thompson One, Team
Estimates
Analyst Forecast
Target
Mean 25.14
Median 25
High 32
Low 16
Std. Dev 5.67
Total 7
Source: Thompson One
Analyst Comparison
# of
Brokers
Strong Buy 3
Buy 1
Hold 3
Underperform 1
Sell 0
Total 8 Source: Thompson One
Ter
min
al
Gro
wth
Ra
te WACC
7% 7.61% 8%
3% 38.68 28.65 23.44
3.5% 48.03 35.42 29.05
4% 60.51 44.07 36.06 Source: Team Estimates
Jan - 16
Target
Price:
$ 35.42
Greenback Securities January 3, 2015
2
Investment Summary
We issue a Buy recommendation due to four factors, (1) Stable U.S. economic condition
that fosters the Airline industry, which directly and positively impacts Hertz’s main
business segment – Car Rental, (2) Increasing internal revenue drivers due to synergy
with China Auto Rental and Dollar Thrifty Automotive Group, (3) Increasing operational
efficiency from management with cost reduction, and (4) The promising spin off of
Hertz’s growing business in equipment rental.
Cheap oil, cheap ticket, flying revenue
Car rental demand depends on air travel, which in turn is affected by the health of the
national economy. During recessions, car rental revenue often mirrors declines in air
passenger traffic. Car rental companies also see seasonal changes in business depending
on their location and the type of traveler they serve. A large portion of Hertz’s business is
generated by airport traffic, as their on-airport facilities are extesnsive. 29% and 10% of
Hertz’s revenue comes from U.S. on-airport business for leisure and commercial
purposes respectively.
Lower jet fuel prices and an improved economy has created a positive environment
within the airline industry. After reaching its peak at $3.3 per gallon in 2011, Jet Fuel
prices gradually decreased over the past few years, and currently sits at $2.4 per gallon.
Lower Jet Fuel allows airline companies to offer more affordable air transportation to
customers. The Passenger Load factor, which measures capacity utilization of Jet Blue
and U.S airlines industry, signifies a good increasing in seats fillings air cargo from
around 81% in average to 83.6% in 2017. We choose JetBlue to examine the airline
industry because JetBlue has a huge market share in the U.S. and they also have moderate
operation in Latin America like Hertz. In addition, Hertz’s Investor Relations indicates
that JetBlue is a major airline partners.
We collect and calculate correlation of 0.90 that indicates a highly positive correlation
between sales data of Hertz and the Airline industry. Estimated sales of the airline
industry data for the next three years will be around 5% and we expect Hertz’s revenue to
grow similarly.
Who buys car in China anyway!
Hertz partner China Auto Rental CAR Inc., is the largest car rental company in China
which operates 717 rental locations in China, 52,498 vehicles until 6.30.2014. There are
three main drivers for these market increments:
Increased spending on travel by business and domestic tourists due to economic
growth
High urbanization rates, the high costs of owning and driving a car, and
government policies curbing private car usage increase the demand of car rents.
High level of consolidation due to competitions in recent years enhance the
efficiency of car rental market
Customer numbers grow from 450,000 in 2012 to 1,962,000 in 2014, which increased
3.36 times. The annual compound growth rate for customer is 80%. The market shares of
CAR in 2013 was 31.2%, however the second and third largest competitors are 8.2% and
In Million 2009 2010 2011 2012 2013 2014 2015 2016
Sales HTZ 7,101.51$ 7,562.53$ 8,298.38$ 9,202.81$ 10,771.90$
Sales Airline Industry 113,304.81$ 119,319.92$ 144,367.27$ 149,769.72$ 154,856.11$ 161,653.78$ 168,746.00$ 172,006.31$
Source: IndexMundi
Airlines EPS Growth YoY
Source: FactSet, Team estimates
US Airlines Load Factor and
Passenger yield
Source: FactSet, Team Estimate
China Leasing & Rental Index
Source: FactSet
8.8
9
9.2
9.4
9.6
9.8
10
10.2
10.4
10.6
81%
82%
82%
83%
83%
84%
84%
2011 2012 2013 2014 2015 2016 2017
Load Factor Passenger Yield
11.00
11.20
11.40
11.60
11.80
12.00
12.20
12.40
12.60
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
China / Finance/Rental/Leasing -IND - Price (Left)
China - Retail Sales (YoY%) (Right)
Greenback Securities January 3, 2015
3
1.9%. The total market of CAR is greater than the sum of next 9 competitors’ market
share.
Recently, CAR made an overall discount promotion in China on Oct 9th, using the money
raised from an IPO of about 4 billion Hong Kong Dollars on the Hong Kong Stock
Exchange. This price strategy will help CAR to gain greater market share since China’s
car rental market is price sensitive.
China’s car rental industry is one of the fastest-growing markets in all the BRIC nations,
which has a CAGR of 32.03% during 2007 to 2011 according to the BRIC data analysis.
The market is expected to grow at a CAGR of 16% in the next three years.
According to the income statement of CAR, we use last six month sales and last year’s
six month sales to calculate the growth rate in 2014. We assume that the next six months
sales in 2014 will stay the same growth rate. Then we can use the growth rate of sales of
2014 and sales in 2013 to estimate that the total revenue for CAR in 2014 would be ¥
4,375,872,000, which is $716 million.
Hertz’s Outstanding Brand Awareness
The market share of Hertz before acquisition was 25% of the U.S. airport market
behind Avis Budget Group, which has 26% of the market. Dollar Thrifty controls 12% of
the market share and Enterprise has 34% of the market. After acquisition of Dollar
Thrifty, Hertz became the largest airport car rental business with 37% market share,
giving them the greatest coverage at major U.S. airports.
The acquisition synergy helps Hertz to achieve diverse global portfolio and differentiate
customer targeting. Joining forces with Dollar and Thrifty enables Hertz to buy cars more
efficiently, to generate higher utilization, and to scale the benefits of increasingly diverse
vehicle re-marketing channels.
Another advantage of acquisition is to increase gross margin by offering differentiated
product lines to specific customers. The customer of Dollar Thrifty is a low-end customer
while Hertz targets at high-end customers, which gives Hertz the power to increase
product price without losing market shares. After acquisition of DTG, the gross margin of
Hertz increases to 28.9% in 2013 from 22.95% in 2012. The Gross margin in LTM as of
06/30/14 is 30.3% according to Thomson One.
Margin Expansion
Hertz’s management has always embraced efficiency and constant improvement as its
core values. The firm utilizes Lean/Six Sigma principles to streamline business processes,
which results in lower expenses and higher quality services. Also, new design for
operations management has been implemented, by adding 44 large rental locations
globally last year. Hertz’s 2013 annual report shows impressive operating efficiency and
cost reduction.
Increases in expenses may be attributed to to recent acquisitions, developments of off-
airport sales forces, and additional brand advertising. However, total expenses compared
to revenue is decreasing over the year from 96.3% in 2011 to 95.1% in 2012 and 93.8%
in 2013. One of the major improvements is SG&A expense, which reduced to 9.5% from
10.7%. The decrease was primarily driven by synergies achieved from the Dollar Thrifty
integration. Regarding the M&A with Dollar Thrifty, Hertz’s management board
expected to have a $300 million cost synergy for three years length. In 2013 annual
Chinese CAR Revenue
Source: Company data, BRIC
analysis, Team estimate
U.S Airport Market Share Before
and After Dollar Thrifty Acquisition
Source: Company data, Auto Rental Industry
HTZ Margin
Source: Company Data
84
136
163
196
0
50
100
150
200
250
2013 2014 2015 2016
CAR (Chinese) Total Revenue ($Mil)
Linear (CAR (Chinese) Total Revenue ($Mil))
Greenback Securities January 3, 2015
4
report, Hertz announced that the firm achieved over $130 million of cost savings which
exceeded the $100 million target. Hertz’s target this year will be $200 million of cost
savings and we believe the firm will be able to achieve this due to its excellent track
record.
We collected and plotted data showing Hertz’s record of operational efficiency
improvement over the last ten years. After two bad years in 2008 and 2009, Hertz’s Gross
and Operating Margin gradually increasing while its SG&A margin decreased. 2013 is an
impressive year for Hertz with only 9.5% in SG&A Margin and 23.5% in Gross Margin.
With ongoing cost reduction program, new operation design and cost synergy with Dollar
Thrifty, we expect the trend will continue in the next year.
Will HERC become a giant?
Realizing the growth prospective of its equipment rental business, Hertz’s management
board decided to spin off the business in order to create stronger growth profile and more
competitive position for each company. The company also announced the intention to
maintain a target net leverage ratio of 2.5x to 3.5x net corporate debt/ corporate EBITDA.
Hertz’s equipment rental business revenue has an average growth rate of 12% in the last
three years. The business segment is also diversifying its revenue into oil and gas
exploration and extraction.
The increase in HERC revenue is primarily due to increases of 12.3% and 3.6% in
worldwide equipment rental volumes and pricing respectively. According to the recent
annual report, the increase in volumes was due to strong industrial performance,
especially oil and gas related. Data indicates that oil production and consumption is
growing over time and demand for oil does not show any weakness. We know that oil
price is plunging but we also know that recent OPEC gave no decision on restricting the
amount of oil production. In addition, with current economic situation in Russia, one of
the big oil exporters, we believe that production won’t slow down. As a result, demand
for oil and gas exploration and extraction will increase, which will positively impact
HERC’s revenue in the future.
Another major impact on HERC business is construction spending. According to reports,
more and more companies choose to rent construction equipment rather than buying them
due to cost-effective reason as well as other factors such as the length of the job, the
difficulty of transporting a piece of equipment to jobsites, and the likelihood of winning
additional projects where that particular piece of equipment will be used.
Due to the nature of Hertz’s operation, it’s easy to find the correlation between Hertz’s
stock price and the U.S.’s Housing Starts data. Since the Housing Starts data has
stabalized, we believe that the equipment rental business will continue its impressive
growth rate of 12%.
Regarding operational efficiency and cost reduction, HERC also improved dollar
utilization of its equipment fleet by 90 bps and reduced out-of-service equipment by 220
bps last year according to the annual report. In addition, HERC continue to achieve better
operation management by using Lean/Six Sigma principles and practice as well as
launching the “Hub and Spoke” program to increase productivity and customer
satisfaction.
Housing Start Index
Source: Gov Census
World’s Construction Industry
Source: FactSet, Team Estimate
Oil Production
Source: FactSet
0
5
10
15
20
25
30
0
200
400
600
800
1,000
1,200
1,400
1,600
2011 2012 2013 2014 2015 2016
Thousands
Sales Earnings Per Share
Greenback Securities January 3, 2015
5
Business Description Hertz is one of the premier brands in the rental car industry. In the car-rental business
segment, the company and its independent licensees and associates operate
approximately 11,555 locations in 145 countries. According to Hertz, it has the leading
airport car-rental market share, by overall reported revenue, in the United States and at
the 120 major airports in Europe. The company also estimates it has the second- largest
market share, by revenue, in the on-airport car-rental market in the United States. In the
equipment- rental business segment, the company rents through 335 branches worldwide.
Hertz has been in the car-rental business since 1918 and in the equipment-rental business
since 1965.
Hertz owns a 19% stake in China Auto Rental, which is the largest car rental company
that occupied 31.2% market shares in China. With 20% growth rate in Chinese car rental
market in next five year, CAR will generate $716 million total revenues in 2014, $859
million in 2015, $1,031 million in 2016, which will contribute $136 million revenues for
Hertz in 2014, $163 million in 2015, $196 million in 2016. Besides, the benefit of the
synergy will increase international customer service because those companies would
share customer information and service networks.
In 2012, Hertz acquired Dollar Thrifty Automotive Group for $2.3 billion. The
acquisition generates long-term benefits for Hertz both on a strategic level and in
diversifying its global portfolio. The synergy of acquisition of DTA is believed to have
100 million revenues in 2013 and 300 million revenues in next three years according to
the CEO’s letter. On the other hand, the company anticipates at least $160 million of
annual cost synergies from the transaction.
Economic Analysis
Recovery bring more revenues
Despite other revenue drivers, economic recovery plays an important role on the increase
of Hertz revenue, especially in the United States where 73% of revenues were generated
in 2013. Car rental demand depends on air travel, which in turn is affected by the health
of the national economy. The correlation between Gross domestic product in U.S. and
domestic traveling is 0.96, which indicates a strong, positive relationship. In addition, the
revenue generated from U.S. car rental has 0.9 correlation with sales of airline industry,
which supports the idea that the passengers generate due to GDP growth will contribute
the revenue growth for Hertz.
We expect Hertz revenue to continue expending from current $10.7B to $16.1B due to
1) Healthy economy provides sound environment for car rental. Although world
economies still struggle from the problems left by the Great Crisis, the recovery starting
to take hold to advanced economics is becoming boarder, such as U.S. and U.K. In U.S,
civilian unemployment rate decreases from 10% in Oct, 2009 and reaches to five year
low at 5.8% in Nov, 2014. Real personal consumption expenditures increased 3.2 percent
in the third quarter, compared with an increase of 2.5 percent in the second. US GDP
growth rate in second quarter 3.9% and third quarter 5.0% of 2014 are beating previous
estimates and market expectations. Together with other recovery indicators, we assume
that the U.S. economy gain a strong recovery and will continue to be better in 2015. As
for Europe, except United Kingdom which made great economic progress with 2.5%
HTZ Revenue
Source: Company data, Team Estimates
Sales of HTZ and Airlines
Source: SEC Filings, FactSet
GDP Annual Growth Rate
Source: World Banks & Team
Estimate
Greenback Securities January 3, 2015
6
estimate GDP growth rate in 2014, most of the countries enter a period of stagnation or
even worse, causing by the Great Crisis and debt issue. However easing monetary policy
stimulus by ECB still can carry economies with positive recovery.
2) In Asia, China continues to maintain high annual GDP growth rate at 7.4 % in
2014 and estimate to be 7.2% in 2015 cause by the world potential growth downturn,
which is consistent with forecast by IMF.
3) Crude oil price free falls. Crude oil price drops from $100 in September to current
$60 per gallon, leading other types of oil decrease, such as jet fuel which decreases from
peak $3.3 in 2011 to currently $2.4 per gallon. Lower oil price drives U.S. economy
growing and encouraging more traveling by airline and car. Airline ticket price will
gradually decrease in 2015 because cost of jet fuel, which consist 31.5% of operating cost
of airline industry, will largely decrease, causing expansion and price war in next few
years according to strong positive airline ticket price to oil price elasticity in the past.
However, due to the oil price hedge, lessons from airline history, and 85% fill in seats,
there is no need for airline industry to offer better deal immediately at current ticket price.
4) Traveling preference shifting. The annual growth rate for US citizen traveling
increases from -3.8% in 2010 to 1.4% in 2013. However, the monthly growth rate
increases dramatically after April 2013 from -3.5% to 7.3% in September 2014. Those
numbers indicate that there is increasing number of U.S. citizens traveling after the
economy recovery and we believe the growth rate will maintain at 8%, which indirectly
support our recommendation
Big pile of cash in equipment
The US commercial and industrial equipment rental and leasing industry includes more
than 8,000 companies with combined annual revenue of about $50 billion and it’s heavily
depended on the economy. Emerging economies are forecast to grow 4.8 percent in 2014,
according to the Conference Board. In contrast, we expected developed economies to
only grow 2.2 percent.
The first rate hike in 2015
Regarding the loan rate, Hertz’s operation utilizes a large amount of financing for their
fleets. The data collected shows a slightly increase of loan rate for new car loan from
commercial banks. U.S economy is currently in a better condition compare with other
countries like Russia, Japan, and the European Union. Japan and European Union are
copying what the Feds did in 2009 issueing a series of quantitative easing to pumps
money in the system, while Russia struggled to fight inflation due to weak economy and
bottom low oil price. We expect that attracting capital inflow by increasing interest rate
with appreciated exchange value will probably be the next step by the U.S government.
Like many analysts, we predict that interest rate will be stable this year and pick up
slowly, the first interest rate hike will be around June 2015.
Rentals companies and Auto Resale Values The profitability of rental companies is sharply affected by the difference between new
and used car and truck prices. Even companies that acquire cars through guaranteed
residual value programs eventually see larger spreads between acquisition and residual
values if used car prices are weak. We can see that the data on USA vehicle sales is very
heavily correlated with the Hertz stock price. It could be explained due to the fact that a
small portion of Hertz earnings comes from car sale. Also, if the public buy more car
according to the Personal Expenditure Consumption and Vehicle Sales data, dealer would
be more interested to enter in sell-buyback contract with more benefit cost advantage to
Hertz
Gasoline and Crude Oil Price ROC
Source: IndexMundi
Monthly Change – US Citizen Travel
Source: National travel
US Govt 10 Yr & Fed Fund Rate
Source: FactSet
0
1
2
3
4
5
6
US Govt Yield - 10 Yr Fed Fund Target Rate
Greenback Securities January 3, 2015
7
Industry Overview and Competitive Positioning
Fleet management: Brand and Size are all that matter
Even though Hertz Corporation is usually considered a high-end service with expensive
fee, the firm actually has the most diverse business segments among the competitors. The
classic Hertz brand operate in a high-end segment of the car rental industry, offering
excellent service with premium experience. In 2012 the company acquired Dollar and
Thrifty giving customers option to choose a budget-friendly and high quality service in
the middle-end segment. In 2013 Hertz introduced Firefly car rental, a cost-friendly brand
with significance value.
As the end of 2013, Hertz has 524,500 cars in US combined with 179,500 internationally
compare to 342,000 cars in the U.S and 145,000 cars internationally of Avis Budget.
According to data we found on auto rental, the market size of car rental industry is $24.5
billion dollar in which Hertz and its main competitors Enteprise and Avis has 25.7% and
34% and 21.2% in market share respectively. Hertz completed more than 34 million
vehicle rental transaction worldwide in 2013. We expected Hertz to continue maintaining
its position and gradually gain more market share as our economic forecasted growth.
Revenue per day, Revenue per transaction
Hertz shows a great improvement in terms of fleet management by increasing its’ Total
Revenue Per Transaction Day (RPD) to $47 in 2013 from $46.33 in 2012 compares to
$40.55 in 2013 and $40.22 in 2012 from Avis. The international operating data is even
more impressive with Total RPD reaches $53.81 compares to $42.48 from Avis Budget
Car in 2013. Forecast on total U.S car rental RPD decreased 4% over year in 2014 and
Hertz total RPD will be decreased 2% according to investor relations.
Non - Program Mix and depreciation advantages
Hertz is on its way to find the optimal mix between program and non-program casr in the
fleet. Non-program cars (risk vehicles) allow Hertz to be more flexible with holding
terms that can generate more incremental savings. Currently risk vehicles accounted for
80% of Hertz’s U.S operating fleet compare to 65% from Avis, which gives Hertz a
competitive advantage on holding period. Due to recent announcement, we expect Hertz
to decrease the percentage of risk vehicle to 70%. The new mix might offset the holding
period yet will maintain the depreciation rate. Hertz’s car rental depreciation rate is
26.9% in 2012 and 26.3% in 2013 compare with Avis at 27.8% in 2012 and 31.7% in
2013. With the new optimal mix we expect Hertz depreciation rate to say around 26% in
the next year.
Table Reserved
The barrier for entries is high since the industry require high capital and high investment
costs. Existing companies all have economic of scale and brand recognition over a long
period of time. Unconventional with innovative strategy like Uber account for a very
small market share since the business main competitor is taxi and cab. In addition, Uber
has received a lot of criticism and even charge to stop operating business in Indiana.
Locations U.S. and International
Source: Company Info
Source: Company Info
Fleet size
Source: Company info
Source: Team analysis
Greenback Securities January 3, 2015
8
Valuation
We have valued the company with a DCF model using free cash flow to the firm
supported by comparables multiple pricing model. The DCF model is the most
appropriate method to value the company as the company is fairly leveraged and
produces a healthy free cash flow.
Our DCF analysis gives us a price target of $ 35.42, the price derived from perpetuity
growth method. We have used a growth rate of 3.5% to determine this price target. The
major factors to the model flowing from;
1. Revenue Estimates and Margin Estimates: We are certain that the compay can
maintain a 8.38% CAGR from 2013 to 2018 primarialy because of an improvemet in the
GDP in the US and an increase in airline travel making better opportunities for Hertz to
grow. The equipment rental business is also bound to see a good growth worldwide due
to more higer spends on construction activites worldwide and in the US.
2. Free Cash Flows: We expect the company to generate healthy Free Cash Flows from
2014 to 2018 as shown below.
3. WACC: Our WACC calculation of 7.61% was calculated with the following inputs.
We have derived the cost of equity using the CAPM model. Since we are building a 5
year DCF model, we have taken the 5 year US treasury bond yield of 1.65% as the risk
free rate plus a premium of 1% as we are of the view of the yields increasing in coming
years. We have a risk premium of 6.85%, calculated form the historical S&P returm
minus the risk free rate. We have derived our beta of 1.65 as an average of the beta of
the stock in comparison with S&P 500 for the last 3 years. The cost of debt of the
company is based on the yield of the B+ rated bonds, currently at 5.03%. The post tax
cost of debt is 3.27%.
Cost of Equity: 13.92% Cost of Debt: 5.03%
Risk Free Rate: 2.65% Tax Rate: 35%
Expected Market Return:9.5% Post Tax Cost of Debt: 3.27%
Beta: 1.65
WACC: 7.61%
4. Peer group Pricing: The mean EV/EBITDA multiple for the peer group of the
company was 6.8x while the median EV/EBITDA multiple was 7x. On this basis, we
feel it is right to give Hertz an EV/EBITDA multiple of 7x. At an EV/EBITDA we get a
target share price of $ 37.83 which supports the target price obtained through perpetuity
growth method.
Year Est. FCF
2014 $1,219
2015 $1,182
2016 $1,288
2017 $1,407
2018 $1,538
Source: Team Estimates
WACC
Cost of Debt 5.03%
Tax Rate 35%
After-tax Cost of
Debt 3.27%
Cost of Equity 13.92%
Source: Team Estimates
Greenback Securities January 3, 2015
9
5. M&A valuation Method: Another way to evaluate the value of Hertz is through
historic industry M&A. Through our M&A valuation model based on six most
influential deals in the industry, we come up with price of $39.41 which is 57.51%
upside potential. The basis of the model is to value Hertz if it is been taken over.
Using four valuation multiples in each deal and current year’s sales, EBITDA, EBIT,
and EPS from Hertz, we equal weight each deal value and come up with $39.41
which supports our DCF model $40 with buy recommendation.
Estimate Price
Over(Under)
Valued
RSC Holding Inc $45.0 80%
Dollar Thrifty $12.9 -48%
Avis Europe Plc $17.9 -28%
Zipcar Inc $88.8 255%
US Rentals $19.6 -22%
Bucyrus Int. $52.2 109%
Average $39.4 58%
Financial Analysis
US Market continues to be driving revenue source
Hertz revenue growth continues to be driven by the by it rental business is both the
Americas as well as other developed or developing nations such as those in Europe and
Asia respectively. Despite the economic slowdown in both Europe and Asia, the United
States generates the core business revenue. We expect global revenue to grow for both
the car and equipment rental business at a CAGR of 16.92% and 17.45% respectively
through 2018 as well as net income at 18.08%.
Hertz as previously mentioned has focused on their push towards “risk” or “non-
program” vehicles, notably within the US (See exhibit XX). Such vehicles, due to the
increased holding periods allow the company to spread depreciation expense over a
greater period. These vehicles also allow for greater flexibility when it comes to
disposition and provided the opportunity to turn these assets into profit through car sales.
We forecast HTZ to expand their EBIT margin to 10.10% by 2018. This expansion is
largely being driven by an increase in the diversity of their fleet. HTZ continues to strike
deals outside of the traditional Ford and GM partnerships with companies such as Nissan,
as well as Porsche to the “dream fleet”. This increase in automobile options allows HTZ
to gain bargaining power thereby increasing their margins. The increased purchasing
power, coupled with lower automobile prices directly reduces depreciation expense on a
per car basis.
Segment CAGR
Worldwide car
rental 16.92%
Worldwide
equip. rental 17.45%
Source: Company
2013 2012 2011
A 0.91 0.95 0.83
B 0.76 0.79 0.75
A) % of non-program U.S. rentals
B) % of non-program Int'l rentals
Source: Company
Greenback Securities January 3, 2015
10
Cash Flow
With a current debt to capital ratio of 85.48, the company’s credit rating has been held
below investment grade. HTZ will see increased FCF of $5.4bn through 2018. This
increased cash flow will allow the company to pay down a portion of their $16bn in debt
even before the potential cash influx from the spin-off of the HERC business.
Approved in mid-2014, HTZ’s spin off of the HERC business will allow HTZ to reduce
their Net Debt/ EBITDA as well as potentially improve their credit rating to investment
grade once they meet their leverage ratio target range of 2.5x to 3.5x as earlier noted. In
addition to the debt pay-down, management has a plan in place to return cash to
shareholders of up to $1bn in share-buybacks into the future. A buy back of even half this
amount would equate to a potentially $.04 increase in EPS from current levels at our
price target of $35.42 all else being held constant.
Balance sheet growth
HTZ cash balance we estimate will continue to grow to $4.3bn into 2018. As of the most
recent financial reporting period the company had a cash ratio of .58 which is up 22% vs.
the prior year and also 32% higher than their closest competitor, Avis.
Dupont Analysis
We analysis HTZ’s profitability to demonstrate the return on equity shareholder by 3
steps and 5 steps DuPont Analysis. During 2009 to 2013, ROE for HTZ increased from -
6% to 12.5 % at the CAGR of 20%. The increase of ROE during this 5 years mainly
came from profit margin, which increased from -1.8% to 3.2%. During 2012 and 2013,
the growth rate for profit margin was 26.9% and 19.3%, contributing to 117% and 66%
for the growth of ROE.
Based on DuPont 5 steps analysis, interest burden increased around 20% in 2012 and
2013, which drive the most growth for the growth of ROE. As we forecast for 2014 to
2018, as total revenue grows, the asset turnover and interest burden will increase, which
contribute to the increase of ROE. However, when we consider the factor that the interest
rate will goes up in next five years, interest burden may decrease, which may cause the
slow growth for ROE.
Industry Analysis – Competing Across Industries The car rental business is generally tied to the overall health of the economy. Any
reduction in consumers’ purchasing power will negatively impact the car rental business,
as consumer gravitate towards less costly alternatives such as public transportation or
carpooling. Conversely, a strong economy will increase demand for car rentals globally,
therefore improving Hertz’s business. We cautiously optimistic about the economic
forecast, which should translate into modest gains in the car and equipment rental
industry. With respect to Hertz’s competitors, please consider the following assessments.
Price Ranges
48.0 35.4
29.0
1,000 0.81 0.83 0.84
500 0.79 0.80 0.80
250 0.78 0.79 0.79 Share buyback (in Millions)
Source: Team Estimate
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Stock Price
(10/1/2014)
Net Income
LTM (M)
2013
EV/EBIT
2013 EV
Sales
2013 ROE
(%)
Hertz 23.7 353.5 19.53 2.67 12.49
Ashtead Group 1646 402.9 12.98 2.88 22.62
Caterpillar 97.6 3,887.9 11.05 1.12 19.76
United Rentals 104.4 660.9 13.7 2.92 22.28
Avis Budget 53.3 314.9 19.49 1.81 2.09
Amerco 259.8 342.4 7.02 1.55 23.37
Sixt SE 32.4 131.8 12.46 1.26 13.98
Positive Forecast for Car Rentals Regarding 2013 sales, Hertz has outperformed all of the car rental companies that we
have analyzed. This includes Amerco (U-Haul), Avis and Sixt. Hertz’s status as the
benchmark for car rental companies will never be in jeopardy, and as the economy
continues to recover, they should expect modest gains. While their equipment rental
business is not quite established, we are not concerned since this is not their main source
of income (in addition to the impending spin-off).
Mixed Results by Product Line
With regards to 2013 sales, Hertz is outperforming all of the car rental companies that we
have analyzed. This includes Amerco (U-Haul), Avis and Sixt. This is consistent with
Hertz’s performance with regards to net income, as they have outperformed their car
rental competitors in this key indicator. Hertz’s equipment rental business, however, has
lagged in these areas. Caterpillar and United Rentals dominate this industry, while Hertz
has struggled to establish itself.
Underwhelming Returns With regards to return on equity, we see a familiar trend. Hertz has remained on top of
the publicly traded car rental companies. In comparison to Avis, they are extremely
efficient at producing profits for every unit of equity. SIXTE, a high-end international car
rental brand barely edges out Hertz in this category. Hertz, however, is a substantially
larger company so it is somewhat impressive that their returns as a proportion of
shareholder’s equity are so similar. Again, the equipment rental companies we have
outlined have performed significantly better with regards to this key economic indicator.
Positive Anecdotes
Hertz’s share price as of October 2014 is lower than that of its competitors, despite it
being one of the preeminent car rental companies. As they expand their operations to
more airports, and are able to reduce prices as a function of offering insurance (a high
margin business), and unmanned kiosks, they will become more desirable to cost-
conscious consumers. In addition, they are currently integrating Dollar Thrifty into their
business, which will further their efforts to reach a greater market share. Price has been
identified via our market survey as the primary factor when choosing a brand – should
they be able to offer lower prices relative to competitors, they will improve their financial
standing. Since their share price is relatively low, and since we expect them to grow their
car rental business, this represents an opportunity for prospective investors. In addition,
as they spin off their equipment rental business, which will become a separate entity, they
can concentrate solely on their main source of income, car rentals.
Program %
Source: Company Info
Accident Rate
Source: WHO
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Investment Risks
Residual risk: The percentage of “program cars” that, manufacturers agreed to
repurchase at a specified price or guarantee to depreciation rate has decreased from 48%
to 30% in Hertz car rental fleet. Additionally, the decline in the value of the non-program
cars cause severe residual risk for the company. Compared to Avis’s 37% program cars,
Hertz faces bigger challenges.
Reductions in the levels of airline passenger travel: The car rental industry is
particularly affected by reductions in business and leisure travel, especially with respect
to levels of airline passenger traffic. Reductions in levels of air travel, whether caused by
general economic conditions, airfare increases or other infrequent events such as
disasters, diseases, or work stoppages can influence both cost and revenue severely.
Further, decreases in levels of airline passenger traffic in key leisure destinations,
including Florida, Hawaii, California and Texas, also affect the company.
Fuel price fluctuation: Oil prices are down from $105.93 in June to the present price at
$52.69(Jan. 5 2015), giving Hertz a great chance to reduce its expense in fuel. However,
according to the historical data of oil price, it fluctuates a lot, so oil price can still be a
risk.
Car-Sharing Rentals Grow (Zipcar): A new model for people to go out more
conveniently with cars called car sharing are created and developed. Roughly 18 percent
of Americans have used a car-sharing service. For Hertz, it is not only a challenge but
also an opportunity because it captures parts of car rental market share, reducing revenue
of Hertz. On the other hand, Hertz can take action immediately to think of new car rental
program to compete with other competitors.
Rental Fraud, and Traffic Accidents (China): Since Hertz cooperates with the Chinese
largest car rental company, we should take the risk that car rental companies in China
face into account. Rental fraud and traffic accidents are two of the largest risks. China has
roughly one-third as many vehicles as the United States does, yet it sees about 20,000
more traffic deaths per year, causing huge insurance cost.
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Appendix
Appendix 1: Income Statement and Free Cash Flow Buildup
Appendix 2: Valuation: Perpetuity vs Exit Multiple
Appendix 3: WACC
Appendix 4 : Sensitivity Analysis – Exit Multiple
Appendix 5: Deal Comps for Car Rental Industry
Appendix 6: DuPont Analysis
Appendix 7: U.S. Civilian Unemployment Rate
Appendix 8: U.S. Personal Consumption Expenditures
Appendix 9: European Annual GDP forecast
Appendix 10: GDP Annual Growth Rate
Appendix 11: Oil (WTI) Price
Appendix 12: Fuel cost in Airline Industry in 2013
Appendix 13: US Citizen Monthly Traveling
Appendix 14: SWOT Analysis
Appendix 15: Porter’s Five Force
Appendix 16: Accident Responsibilities between Different Types of Vehicles
Appendix 17: Car Rental Survey Results
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Appendix 1:
Figure 1: Income Statement in millions
Income Statement Data
($ In Mn) Projected Annual Forecast
2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018P
Revenue $8,299.3 $9,024.9 $10,771.9 $11,689.3 $12,574.0 $13,645.4 $14,827.6 $16,133.4
Revenue Growth Rate (%) 8.74% 19.36% 8.52% 7.57% 8.52% 8.66% 8.81%
EBITDA $3,043.2 $3,416.5 $4,150.9 $4,137.9 $4,460.4 $4,851.2 $5,282.7 $5,759.7
EBITDA Margin (%) 36.67% 37.86% 38.53% 35.00% 35.50% 35.75% 36.00% 36.25%
EBIT 1,075.5 1,175.5 1,500.6 $1,144.9 $1,240.9 $1,357.4 $1,486.2 $1,628.8
EBIT Margin (%) 12.96% 13.03% 13.93% 9.79% 9.87% 9.95% 10.02% 10.10%
Depreciation & Amortization $1,967.6 $2,241.0 $2,650.3 $2,993.0 $3,219.5 $3,493.8 $3,796.5 $4,130.9
D&A as a % of revenue 23.71% 24.83% 24.60% 25.60% 25.60% 25.60% 25.60% 25.60%
Free Cash Flow Buildup
($ In Mn) Projected Annual Forecast
2014A 2015A 2016A 2017A 2018A
Period 1 2 3 4 5
Total Revenues $11,689.3 $12,574.0 $13,645.4 $14,827.6 $16,133.4
EBITDA 4,137.9 4,460.4 4,851.2 5,282.7 5,759.7
EBIT 1,144.9 1,240.9 1,357.4 1,486.2 1,628.8
Tax rate 35.0% 35.0% 35.0% 35.0% 35.0%
EBIAT $744.2 $806.6 $882.3 $966.0 $1,058.7
Depreciation & Amortization 2,993.0 3,219.5 3,493.8 3,796.5 4,130.9
Accounts receivable (128.8) (124.2) (150.5) (166.0) (183.4)
Inventories (13.4) (8.0) (9.7) (10.7) (11.8)
Prepaid expenses (103.8) (62.1) (75.2) (83.0) (91.7)
Accounts payable 140.1 83.9 101.6 112.1 123.8
Accrued expenses 159.8 95.7 115.9 127.8 141.2
Capital expenditures (2,571.6) (2,829.1) (3,070.2) (3,336.2) (3,630.0)
Unlevered free cash flows $1,219.5 $1,182.1 $1,288.0 $1,406.5 $1,537.7
Discount Rate (WACC) 7.6% 7.6% 7.6% 7.6% 7.6%
Present value of free cash
flows
$1,133.3 $1,020.9 $1,033.7 $1,049.1 $1,065.8
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Appendix 2: Valuation: Perpetuity vs Exit Multiple
in millions
Prepetuity Growth Method
Exit Multiple Method at 7 times
Enterprise Value
$32,167.5 Enterprise Value
$33,248.00
Less: Net debt
16,309.4 Less: Net debt
16,309.4
Equity Value
$15,858.1 Equity Value
$16,938.6
Diluted Shares Outstanding
447.7 Diluted Shares Outstanding
447.7
Equity Value Per Share
$35.42 Equity Value Per Share
$37.83
Appendix 3: WACC
Cost of Equity via CAPM model:
Risk Free Rate:
We have taken the 5 year US treasury bond yield of 1.65% as the risk free rate plus a premium of 1% as we are of
the view of the yields increasing in the coming years. We have conducted an analysis of the yield curve after the
1929 great depression. Post the crisis there was yield increased about 1% over 5 years. Hence we provide a 1%
premium to the risk free rate of 1.65% making our risk free rate to 2.65%
Risk Premium:
S&P500 has provided a return close to 9.5% over the last ten years. Hence we have assumed a market retrun rate
of 9.5% making our risk premium at 6.85%
Beta:
We have derived our beta of 1.65 as an average of the beta of the stock in comparison with S&P 500 for the last 3
years.
Cost of Debt:
The cost of debt of the company is based on the yield of the BB rated bonds, currently at 5.03%. The post tax cost
of debt is 3.27%.
This leads to our WACC of 7.61%
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Appendix 4 : Sensitivity Analysis – Exit Multiple
Multiple
% change in EBITDA
estimates
6 6.25 6.5 6.75 7 7.25 7.5 7.75 8
-7.5% 24.90 26.97 29.03 31.09 33.15 35.22 37.28 39.34 41.40
-5.0% 26.24 28.36 30.48 32.60 34.71 36.83 38.95 41.07 43.18
-2.5% 27.58 29.75 31.93 34.10 36.27 38.45 40.62 42.79 44.97
0.0% 28.92 31.15 33.38 35.61 37.83 40.06 42.29 44.52 46.75
2.5% 30.26 32.54 34.83 37.11 39.40 41.68 43.97 46.25 48.54
5.0% 31.59 33.93 36.27 38.61 40.96 43.30 45.64 47.98 50.32
7.5% 32.93 35.33 37.72 40.12 42.52 44.91 47.31 49.71 52.10
Appendix 5: Deal Comps for Car Rental Industry
EV/Sales EV/EBITDA EV/IBD EV/NI P/E
RSC Holding Inc 3.30x 9.30x 2.10x (179.60x) (25.42x)
Dollar Thrifty Automotive Group Inc 2.40x 5.50x 2.40x 19.60x 12.87x
Avis Europe Plc 0.70x 8.80x 1.50x 43.60x 24.48x
Zipcar Inc 2.10x 11.90x 4.60x 39.50x 33.11x
US Rentals 2.60x 5.90x 3.20x 15.00x 19.43x
Bucyrus International Inc 2.80x 16.00x 5.70x 32.00x 27.96x
Average 2.32x 9.57x 3.25x (4.98x) 15.40x
Current Price 25.00
1 Day
Premium
Acquirer Date Estimate Price Over(Under)
Valued
58.72% United Rentals Inc 12/16/2011 45.00 80.00%
8.02% Hertz Global Holdings Inc 8/26/2012 12.88 -48.47%
59.90% Avis Budget Group Inc 6/14/2011 17.92 -28.34%
48.67% Avis Budget Group Inc 1/2/2013 88.84 255.37%
NA United Rentals 6/16/1998 19.61 -21.56%
32.15% Caterpillar Inc 11/15/2010 52.22 108.88%
0.41 39.41 57.65%
Source: Factset, team estimate
Car rental industry deals
(in million) EV/Sales EV/EBITDA EV/EBIT P/E Date
RSC Holding Inc 3.30x 9.30x 27.00x (25.42x) 12/16/2011
Dollar Thrifty 2.40x 5.50x 10.20x 12.87x 8/26/2012
Avis Europe Plc 0.70x 8.80x 10.20x 24.48x 6/14/2011
Zipcar Inc 2.10x 11.90x 76.00x 33.11x 1/2/2013
US Rentals 2.60x 5.90x 13.80x 19.43x 6/16/1998
Bucyrus International Inc 2.80x 16.00x 19.50x 27.96x 11/15/2010
Average 2.32x 9.57x 26.12x 15.40x
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Name Hertz
Cash 445.00
Sales 10,772.00
EBIT 1570.3
EBITDA 4,342.00
Net Income 346.20
EPS 0.84
Shares Outstanding 445.80
Total Long term debt 16,309.00
Total asset 24,588.00
Each deal estimate price is calculated by using valuation multiplier, including EV/Sales, EV/EBITDA, EV/EBIT,
and P/E ratio. By equally weighting all estimate price, we come up with final estimate valuation price $39.41,
which is 57.65% greater than current stock price $25.00.
Estimate Price Over(Under)
Valued
RSC Holding Inc 45.00 80.00%
Dollar Thrifty Automotive Group Inc 12.88 -48.47%
Avis Europe Plc 17.92 -28.34%
Zipcar Inc 88.84 255.37%
US Rentals 19.61 -21.56%
Bucyrus International Inc 52.22 108.88%
Average 39.41 57.65%
Sources: Factset, team estimate
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Appendix 6: DuPont Analysis
DuPont Analysis for Hertz
2009 2010 2011 2012 2013
ROE (6.0%) (2.3%) 7.9% 9.7% 12.5%
ROA (0.8%) (0.3%) 1.0% 1.0% 1.4%
leverage factor 7.6x 8.2x 7.9x 9.3x 8.9x
Profit Margin (1.8%) (0.6%) 2.1% 2.7% 3.2%
Asset turnover 44.4% 43.6% 47.0% 38.7% 43.8%
DuPont 5 steps Analysis for Hertz
2009 2010 2011 2012 2013
ROE (6.0%) (2.3%) 7.9% 9.7% 12.5%
leverage Factor 7.6x 8.2x 7.9x 9.3x 8.9x
Asset Turnover 44.4% 43.6% 47.0% 38.7% 43.8%
Tax Burden 53.5% 332.7% 45.5% 50.0% 45.1%
Interest Burden (52.9%) (2.0%) 35.8% 43.0% 52.2%
Operation Margin 6.3% 9.9% 13.0% 12.5% 13.7%
DuPont 5 steps Analysis for Hertz Projected Year
2014 2015 2016 2017 2018
ROE 6.5% 7.6% 9.0% 10.0% 10.9%
leverage Factor 8.5x 7.7x 7.3x 6.7x 6.2x
Asset Turnover 47.8% 50.8% 54.0% 57.2% 60.1%
Tax Burden 65.0% 65.0% 65.0% 65.0% 65.0%
Interest Burden 27.8% 33.5% 39.3% 44.7% 49.7%
Operation Margin 8.8% 8.9% 8.9% 9.0% 9.1%
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Appendix 7: U.S. Civilian Unemployment Rate
Source: US. Bureau of Labor Statistics
Appendix 8: U.S. Personal Consumption Expenditures
Source: US. Bureau of Economic Analysis
0.0
2.0
4.0
6.0
8.0
10.0
12.0
200
0-0
1-0
1
200
0-0
7-0
1
200
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1-0
1
200
1-0
7-0
1
200
2-0
1-0
1
200
2-0
7-0
1
200
3-0
1-0
1
200
3-0
7-0
1
200
4-0
1-0
1
200
4-0
7-0
1
200
5-0
1-0
1
200
5-0
7-0
1
200
6-0
1-0
1
200
6-0
7-0
1
200
7-0
1-0
1
200
7-0
7-0
1
200
8-0
1-0
1
200
8-0
7-0
1
200
9-0
1-0
1
200
9-0
7-0
1
201
0-0
1-0
1
201
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1
201
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201
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1
201
2-0
1-0
1
201
2-0
7-0
1
201
3-0
1-0
1
201
3-0
7-0
1
201
4-0
1-0
1
201
4-0
7-0
1
Civilian Unemployment Rate
8000.0
8500.0
9000.0
9500.0
10000.0
10500.0
11000.0
11500.0
12000.0
12500.0
200
7-0
1-0
1
200
7-0
5-0
1
200
7-0
9-0
1
200
8-0
1-0
1
200
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200
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1-0
1
201
4-0
5-0
1
201
4-0
9-0
1
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Appendix 9: European Annual GDP forecast
Source: European Commission
Appendix 10: GDP Annual Growth Rate
2010 2011 2012 2013 2014e 2015e
United States 2.5% 1.6% 2.3% 2.2% 2.3% 2.6%
United Kingdom 1.9% 1.6% 0.7% 1.7% 2.5% 2.8%
Germany 4.1% 3.6% 0.4% 0.1% 1.6% 1.1%
France 2.0% 2.1% 0.3% 0.3% 0.4% 0.1%
Italy 1.7% 0.6% -2.3% -1.9% -0.4% -0.1%
Spain 0.0% -0.6% -2.1% -1.2% 1.3% 2.2%
China 10.4% 9.3% 7.7% 7.7% 7.4% 7.2%
Japan 4.7% -0.5% 1.8% 1.6% 0.1% -1.1%
Australia 1.9% 3.1% 0.9% 0.2% 0.2% 0.1%
South Korea 6.5% 3.7% 2.3% 3.0% 3.4% 3.3%
Source: The World Bank, team estimate
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Appendix 11: Oil (WTI) Price
Source: St. Louis Fed
Appendix 12: Fuel cost in Airline Industry in 2013
Company name (in millions) Fuel
cost
Operating
cost
Percentage
JetBlue Airways Corporation (JBLU) 1,899 5,013 37.9%
American Airlines Group Inc. (AAL) 7,839 25,344 30.9%
Southwest Airlines Co. (LUV) 5,763 16,421 35.1%
United Continental Holdings, Inc. (UAL) 12,345 37,030 33.3%
Delta Air Lines, Inc. (DAL) 9,397 34,373 27.3%
Average 7,449 23,636 31.5%
Source: Annual reports
Appendix 13: US Citizen Monthly Traveling
Source: National Travel and Tourism Office
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
Oil (WTI) Price
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
US Citizen Monthly Traveling
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Appendix 14:
SWOT ANALYSIS
Strengths
Hertz captures 25% market share of the car rental business, an impressive figure for a high-end brand.
Hertz has developed a 24/7 unmanned service available via kiosks and online allowing customers to rent cars hassle-
free. This technological advance is expected to increase their capacities for high volume and improve customer
service, factors that will positively impact their non-airport market share.
The Company has strong partnerships with numerous companies in different industries such as airlines, railways,
hotels and travel
This advance will also decrease costs and enable Hertz to offer more competitive prices
Hertz’s car sales business is shifting away from auction in favor of selling directly to dealers and retail. The per-car
benefit of this shift is about $500-1000.
Hertz has managed to decrease fleet depreciation substantially since 2006
Hertz’s equipment rental business is substantial, as they are the third largest competitor.
Hertz has outstanding brandawareness.
Weakness
Accounting issues has put Hertz behind in its financial reporting by two quarters as of October 2014. This will
undoubtedly scare investors if they fail to address the issue in the coming months.
Hertz’s on-airport facilities have reported being over-fleeted in 2013 due to lower-than-expected airline volumes.
Hertz is second to Enterprise in the market share despite its impressive degree of brand awareness.
Hertz’s business operations heavily funded by debt rather than equity which may hinder the company from borrow
and repay money. The company has a debt/equity ratio of 5.89
Opportunities
Hertz recently has invested in its insurance business, a major source of revenue for Enterprise, the current market
leader.
Hertz reaching out to grab the lower-end of the market by acquiring Dollar Thrifty. The move will deliver a revenue
synergy of $300 million.
Hertz has expended their brand extensively within the car rental business, by offering more diverse product lines
than previously available.
They have 10 registered and 16 pending patents, which represents opportunities for technological growth.
With respect to the equipment rental industry, companies are gravitating towards renting rather than purchasing
products.
Anticipated spin-off of the equipment rental business demonstrates their high expectations in this realm.
The economy’s impending rebound will improve their share price.
The growth of the Chinese market and IPO of China Car Rental.
Threats
Their residuals are very sensitive; as a 1% change to residuals could result in a pretax profit/loss of $83 million.
The amount and level of competition is increasingly aggressive.
Global travel is also sensitive to the threat of terrorism posed by ISIS.
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Appendix 15:
PORTER’S Five Forces
THREAT OF
NEW
ENTRANTS
POWER OF
SUPPLIERS
POWER OF
BUYERS
THREAT OF
SUBSTITUTES
RIVALRY
Low Low High Moderate High
High capital and
investment costs
High number of
suppliers in the
industry
Low switching costs Various substitute
services: Uber,
ZipCar, Lyft, Yellow
Cab,…
Numerous
competitors
Innovative entry
with unconventional
services
Supplier’s products
are important inputs
but has low
switching costs
High bargaining
power due to low
switching cost and
variety of
competitors
Threats of substitutes
depends on the travel
purpose and distance
of customers
Strong price
competition
Demand curve is
very elastic and
heavily based on
pricing strategy
Low bargaining
power
With internet, buyers
are now able to
compare price and
make decision
Moderate industry
growth (depend on
the economy)
Economies of scale
create advantage
High price sensitive
and moderate
experience sensitive
High exit barriers
Easy to imitate
product
differentiation
Customer loyalty
varies upon type of
customers
Appendix 16: Accident Responsibilities between Different Types of Vehicles
Drivers/Road Users Vehicles Total
Trucks 22.2% 6.4% 28.6%
Coaches/Buses 7.0% 1.8% 8.8%
Cars 20.4% 3.1% 23.5%
Motorcycles 19.7% 2.3% 22.0%
Other Motorized Vehicles 9.0% 2.9% 11.9%
NMV/Pedestrians 5.1% 0.0% 5.1%
Total 83.4% 16.5% 99.9%
Source: China Road Traffic Safety - World Bank
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Appendix 17: Car Rental Survey Results
The results of our survey undoubtedly support our ‘buy’ recommendation. Consumers have certain expectations
when participating in a rental transaction. They are not overwhelmingly emotional with regards to any brand, but
gravitate towards what they know and trust.
Three major brands dominate the market, according to our survey, as consumers are weary of lesser popular
companies. Only 13% did business with companies other than Hertz, Avis or Enterprise. In addition, Hertz has
received an impressive 40% of the market share. This is promising.
Purpose Hertz has affiliated its company most commonly with travel. 68% of those surveyed have rented a car from Hertz
via an Airport facility. Hertz intends on growing their presence at airports, which given this statistic, will improve
their business.
Of those surveyed who have used Hertz, most have done so for Leisurely purposes. They are vacationing and are
in need of private transportation. This supports Hertz’s objective of obtaining business from vacationers. Coupled
with their intentions of increasing their airport presence, we are very optimistic.
Hertz, 38.46%
Avis, 27.69%
Enterprise,
26.15%
Other, 13.85%
0.00%
50.00%
100.00%
Business Leisure Local Commute Other
Rental Care Purpose
Greenback Securities January 3, 2015
25
Customer Satisfaction Our survey indicated that most consumers are not loyal to a particular brand – they want a reliable and safe
service that does not interrupt precious vacation time. Consumers do not react very emotionally (unless negative)
in favor of a certain brand.
It is no surprise that only 12% of those surveyed consider Hertz’s service to be ‘Excellent’. It is difficult to
quantify a service as excellent when it is as unexciting as renting a car. The heart of the matter lies in those who
are satisfied. According to those surveyed 67% were satisfied – a notable figure when considering how unpleasant
overall travel experiences can be. We are impressed by their ability to consistently deliver a familiar product to
satisfied consumers.
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company.
The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or
publication of this report. [The conflict of interest is…]
Receipt of compensation:
Compensation of the author(s) of this report is NIL
Market making:
The author(s) does [not] act as a market maker in the subject company’s securities.
Ratings guide:
Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater
over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.
A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.
Investment Research Challenge and Global Investment Research Challenge Acknowledgement:
Fordham Univestity Investment Research Challenge as part of is based on the Investment Research Challenge originally developed by Fordham University.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but
the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a
solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Fordham
University Challenge with regard to this company’s stock.
Excellent
12%
Satisfactory
67%
Poor
4%
Other
17%
Hertz Customer Satisfaction