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 2 th , 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 Terminal Growth Rate 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
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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
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
Greenback Securities January 3, 2015
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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.
Greenback Securities January 3, 2015
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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
Greenback Securities January 3, 2015
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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
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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.