Many investors have bet against car rental company Hertz Global. But activist investor Bill Ackman has built a 19.8% stake in the company, according to an April 16 Pershing Square Capital regulatory filing, the Globe and Mail reported.
Since April 15, Hertz stock – about 40% of whose shares are sold short, according to the Wall Street Journal – have surged 131%.
Is now a great time to buy Hertz stock? Here are four reasons to steer clear of of the car rental company’s shares:
- Ackman’s rationale for his $30 a share price target appears shaky.
- Hertz’s $273 million in debt litigation could be expensive to settle.
- Hertz’s bonds are trading at a significant discount.
- Hertz’s stock may now be way overvalued.
Hertz is pleased with Ackman’s investment. “I am humbled, and we should all feel encouraged by Bill Ackman’s comments and energized by the strong support shown by him,” Hertz CEO Gil West said in a letter to employees, seen by Reuters.
Ackman warned investors to be wary of the stock even as he argued Hertz – which filed for bankruptcy in 2020 and now has two business lines: renting vehicles and borrowing heavily to own vehicles — is undervalued, noted the Globe And Mail.
Why Ackman’s $30 Per Share Hertz Price Target May Be Iffy
On social media, Ackman – who has a large following among individual investors and owns a big stake in Uber – gave three reasons why shares of Hertz – could be worth $30 per share by 2029, the Globe And Mail reported. These include the following:
- Car rental industry is an oligopoly. Hertz, Enterprise and Avis dominate the rental car market with a combined market share of 95%, Ackman posted on X;
- Hertz has new management – which Ackman says has executed a successful turnaround of operations; and
- A Hertz/Uber partnership could boost profitability for both companies as tariffs raise the value of its used vehicles. Ackman argues 25% tariffs on automobiles could add thousands of dollars to new car prices which will make Hertz’s used vehicles more valuable. He also says a partnership he proposed between Uber and Hertz could increase fleet utilization and profitability for both companies.
While Ackman is right about the industry structure being concentrated, his numbers appear high. Rather than 95% of the market, their share is 83% – Enterprise (39%), Hertz (22%), and Avis/Budget (22%), according to Market.us.
Also, I question how successful Hertz’s turnaround is and whether tariffs and the Uber/Hertz partnership will boost Hertz’s value.
New Management’s Turnaround Is Underwhelming
Hertz entered bankruptcy in May 2020 and emerged on July 1, 2021 under Paul Stone’s leadership – “returning about $8 a share to stockholders in its exit from chapter 11,” noted the Journal.
Mark Fields, who served as interim CEO from October 5, 2021, made the decision for Hertz to order 100,000 Teslas. Despite TV ads from Tom Brady promoting the Tesla fleet, consumers did not take the bait, the Journal reported.
Hertz’s operating costs rose and in February 2022 Fields was replaced by Goldman Sachs veteran Stephen Scherr who built up the EV fleet. In December 2022, Hertz took a $168 million charge to settle 364 claims related to the company falsely reporting rental cars as stolen,” according to CNN.
On April 1, 2024, West – who was previously Delta Airlines chief operating officer — replaced Scherr as CEO. West cut operating costs by selling a large portion of Hertz’s EV fleet and the associated remote charging network – taking a $200 million writedown, the Journal wrote.
The EV blunder reduced Hertz’s earnings, and the company has reported net losses for the last couple of years – including quarterly losses for the most recent five quarters ending December 2024.
Moreover, during that time the rental car company’s debt load has increased 6% to $18.3 billion, its equity has plunged 95% to $153 million, and its revenue fell 6% to about $2 billion in the final quarter of 2024, noted the Journal.
Tariffs And Partnership Benefits May Fall Short Of Ackman’s Forecast
Ackman sees tariffs boosting the value of Hertz’s fleeting of used late-model vehicles and expects a partnership with Uber to increased the companies’ fleet utilization and profitability.
He forecasts Trump’s 25% levy on imported automobiles will boost the value of Hertz’s 500,000 vehicles by 10% – increased their value to $13.2 billion. Moreover, the “$1.2 billion gain on its auto assets is equivalent to approximately half of the company’s current market capitalization,” Ackman said in an X post featured by Bloomberg.
Ackman’s 10% is at the high end of a range of used car price increase estimates. For example, one analyst expects used car prices to rise between a 5% and 10% in prices in the near future, according to iSeeCars.
Of course if that happens, I doubt Ackman expects Hertz to sell all 500,000 of those vehicles. So, it is unclear how much of that $1.2 billion value increase the company will capture.
Ackman is counting on West to boost Hertz’s stock price. Getting there would require the company to reach $1,500 in revenue per unit, around $30 per-vehicle operating expense, about $300 in depreciation per unit, and an increase in fleet utilization from 80% to 85%, Ackman noted on X.
Ackman also floated the idea of Hertz managing a fleet of self-driving vehicles – in its 11,200 global locations – for Uber which is “excited to brainstorm on how we can expand on our relationship,” CEO Dara Khosrowshahi posted on X.
I question the realism of West’s operating targets. Many economists see tariffs causing an economic slowdown. If that happens, consumers and businesses could cut back on travel – thus lowering Hertz’s revenue per unit. Moreover, with tariffs raising the price of auto parts, vehicle operating expenses could go up rather than fall.
Hertz’s $272 Million In Debt Litigation
Hertz faces other threats – notably a $272 million legal judgment from bondholders who claim the company should have paid them interest during its time in chapter 11.
Hertz is appealing the judgment to the Supreme Court. “While the decline of the COVID-19 pandemic and the resumption of global travel rendered Hertz solvent despite the high stakes of this dispute, the nearly $272 million at issue here could make the difference between solvency and insolvency in many cases,” Hertz lawyers wrote in an April 4 petition to the high court featured in a Bloomberg report.
Hertz’s Deeply Discounted Bonds
Bondholders remain wary of Hertz’s junior bonds. They still trade “around 50 or 60 cents on the dollar,” the Journal reported.
Hertz’s Overvalued Stock
Hertz shares are way overvalued in the view of Wall Street. Four analysts who cover the stock set a price target of $2.93 – suggesting the rental car company stock is 181% over-valued.
Short sellers may have contributed to this overvaluation by scrambling to repay the shares they borrowed – assuming some of them purchased the stock in a rising market following Ackman’s announcement of his 19.8% stake.
I agree with Ackman’s concluding thoughts. “Investing is risky,” he wrote on X. “There are no guarantees of a successful outcome. Caveat emptor.”
Consider avoiding Hertz stock.