Hertz Stock Falls After Guidance Gets Chopped -- Update
November 08 2016 - 3:24PM
Dow Jones News
By Mike Colias and Anne Steele
Hertz Global Holdings Inc. shares plunged 30% Tuesday after the
rental-car company reported disappointing financial results and cut
its annual outlook, raising broader concerns over the potential
effect of falling used-car prices on the auto sector.
Investors dumped Hertz shares in early trading on the New York
Stock Exchange following weaker-than-expected third-quarter profits
reported Monday after the market closed. The Florida rental-car
firm blamed steep drops in the value of its smaller cars for the
earnings miss, which came in 57% below Wall Street
expectations.
Hertz, which also owns brands Dollar and Thrifty, also lowered
financial guidance for the year, triggering analyst downgrades.
Hertz shares fell 50% at one point Tuesday before regaining ground
to about $24 in early afternoon trading. The company's shares have
lost nearly 60% of their value so far this year.
Hertz's subpar financial results highlight possible headwinds
for auto makers and dealers already struggling to repeat last
year's record car sales.
The availability of cheaper used cars dampens demand for new
vehicles and could force car companies and dealers to dangle bigger
discounts to keep inventory from collecting dust. That can result
in dented profits. Declining residuals also increase car companies'
expenses for offering enticing leases.
Chief Executive John Tague blamed Hertz's financial results
largely on deeper-than-expected depreciation on small and midsize
vehicles and warned of further drops in the fourth quarter. Sales
of sedans, long a staple for U.S. car shoppers, are falling sharply
as cheap gasoline prices send consumer flocking to pickup trucks
and sport-utility vehicles.
Auto makers in recent months have been offering bigger
incentives and cheaper loans to keep shoppers engaged. Car sales
are off 8% through October, while truck sales of pickups, SUVs and
vans rose 8% and are on track for a record high, according to
Autodata Corp.
Hertz's results "will make people increasingly cautious" about
the impact of lower used-car prices on new-vehicle sales and
leasing, Evercore ISI analyst Arndt Ellinghorst wrote in a research
note.
Still, some analysts suggested Hertz's struggles were unique as
opposed to a broader industry warning sign. Falling residuals for
small and midsize sedans have long been anticipated, and Hertz
suffered more from higher costs and lower rental volumes, several
analysts said. Rival Avis Budget Group Inc. last week reported
better-than-expected vehicle depreciation and posted third-quarter
financial results that beat expectations.
Hertz has struggled to turn around operations after accounting
errors forced it to adjust years of financial results. In addition
an equipment-rental separation that gave it a much-needed cash
infusion to pay down debt, Hertz has been aggressively cutting
expenses, targeting $350 million in cost cuts for the year.
Barclays Capital analyst Brian Johnson noted that deeper
depreciation accounted for only about 20% of Hertz's profit
shortfall versus expectations. The size of the profit shortfall and
slashed guidance suggests "there are likely some ongoing execution
issues," he said in a note.
"This management team may now face questions around
credibility," Mr. Johnson said.
Hertz is already under investor pressure, with activist Carl
Icahn controlling 15% of the company's stock. Mr. Icahn, whose
employees hold three board seats, played a key role in hiring Mr.
Tague to helm Hertz in 2014, pushing back against suggestions from
other activist investors.
Mr. Icahn has kept adding to his stake after Mr. Tague's hiring,
buying more shares in June, and continues to hold shares in the
spun-off Herc Holdings Inc. as well.
Hertz's stock became an activist hotbed in 2014 when Mr. Icahn
and Jana Partners LLC joined a bevy of other investors who have a
proclivity to pressure management, such as Fir Tree Inc. and
Glenview Capital Management LP.
Over all, Hertz's third-quarter profit fell to $42 million from
$237 million a year earlier, the company reported Monday. Excluding
certain items, adjusted profit was $1.58 a share, well below
analysts' expectations of $2.75.
"An abysmal quarter. That's all we can say about this release,"
Wells Fargo analyst Richard Kwas said in a research note. While a
negative guidance revision was expected, "the adjustment was
dramatic."
David Benoit contributed to this article.
Write to Mike Colias at Mike.Colias@wsj.com and Anne Steele at
Anne.Steele@wsj.com
(END) Dow Jones Newswires
November 08, 2016 15:09 ET (20:09 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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