Fordham Securities This report is published for educational purposes only by Tim (Ngoc Do) – [email protected]Date: April, 2016 Industry: Rental And Leasing LET’S GET THE ENGINES STARTED… We issue a Hold recommendation on Hertz with a one-year target price of $13.86 using the Discounted Free Cash Flow Model. This offers a 40% increase from its closing price of $9.85 on Apr 6 th , 2016. Even though HTZ offers great return, we issue a Hold because our target price is lower than concencus and the stock has high risk. Year Revenue EBITDA 1 EBIT PAT EPS 2 PE 2015A 10,535 1,415 1,063 504 1.11 16.2x 2016P 10,679 1,635 1,284 460 1.05 9.4x 2017P 10,978 1,745 1,457 543 1.23 8.0x 2018P 11,274 1,866 1,591 624 1.41 7.0x 2019P 11,580 1,939 1,665 669 1.50 6.6x 2020P 11,895 2,015 1,741 715 1.60 6.2x Major growth drivers include: • Low oil price environment fosters the Airline industry, which directly and positively impacts Car rentals, Hertz’s main business segment • The promising spin off of Hertz’s equipment rental business Major risks include: • Accounting standard risk – recent delay company filings • High price pressure and lower revenue per vehicle • Evolving competitive landscape with Car-Sharing Rentals (Zipcar) Company Overview Hertz is one of the premier brands in the rental car industry with approximately 11,555 locations in 145 countries. Hertz has been in the car- rental business since 1918 and in the equipment-rental business since 1965. Hertz Share Price Data 1 Using Corporate Adjusted EBITDA (does not include depreciation and amortization from rental fleet), and Corporate Net Debt (does not include fleet debt) 2 Recent company guidance: Corporate Adjusted EBITDA $1.6-$1.7B, EPS 0.95-1.10, and effective tax rate of 37% Ticker: NYSE: HTZ Recommendation: Neutral Price: 9.85 (April 6, 2016) Target Price:$13.86 Time Horizon: One Year HERTZ GLOBAL HOLDINGS (‘HERTZ’) Market Profile Closing Price (USD) 9.8 52-Week Range 6.9-22.6 Share Outstandings (M) 424.4 Market Cap (M) 4,000 P/E 16.0 EV/EBITDA 4.9x Source: Yahoo Finance, Thompson One, Team Estimates Analyst Forecast Target Mean 16.4 Median 15.0 High 32.0 Low 12.0 Std. Dev 6.17 Total 7 Source: Thompson One Analyst Comparison # of Brokers Strong Buy 2 Buy 5 Hold 2 Underperform 0 Sell 0 Total 9 Source: Thompson One Source: Team Estimates Apr - 17 Target Price: $ 13.86
Transcript
Fordham Securities This report is published for educational purposes only by Tim (Ngoc Do) – [email protected]
Date: April, 2016 Industry: Rental And Leasing
LET’S GET THE ENGINES STARTED… We issue a Hold recommendation on Hertz with a one-year target price of $13.86 using the Discounted Free Cash Flow Model. This offers a 40% increase from its closing price of $9.85 on Apr 6th, 2016. Even though HTZ offers great return, we issue a Hold because our target price is lower than concencus and the stock has high risk.
Major growth drivers include: • Low oil price environment fosters the Airline industry, which
directly and positively impacts Car rentals, Hertz’s main business segment
• The promising spin off of Hertz’s equipment rental business
Major risks include: • Accounting standard risk – recent delay company filings • High price pressure and lower revenue per vehicle • Evolving competitive landscape with Car-Sharing Rentals (Zipcar)
Company Overview Hertz is one of the premier brands in the rental car industry with approximately 11,555 locations in 145 countries. Hertz has been in the car-rental business since 1918 and in the equipment-rental business since 1965. Hertz Share Price Data
1 Using Corporate Adjusted EBITDA (does not include depreciation and amortization from rental fleet), and Corporate Net Debt (does not include fleet debt) 2 Recent company guidance: Corporate Adjusted EBITDA $1.6-$1.7B, EPS 0.95-1.10, and effective tax rate of 37%
EV/EBITDA 4.9x Source: Yahoo Finance, Thompson One, Team Estimates
Analyst Forecast Target Mean 16.4 Median 15.0 High 32.0 Low 12.0 Std. Dev 6.17 Total 7
Source: Thompson One
Analyst Comparison # of
Brokers Strong Buy 2 Buy 5 Hold 2 Underperform 0 Sell 0 Total 9
Source: Thompson One
Source: Team Estimates
Apr - 17
Target Price:
$ 13.86
Fordham Securities April, 2016
2
Investment Thesis Increasing revenue from low oil price Hertz generates a large portion of its businesses from airport traffic due to extensive on-airport facilities. 29% and 10% of company’s revenues come from U.S. on-airport business for leisure and commercial purposes, respectively. Before the Dollar Thrifty acquisition, Hertz had a 25% market share in the U.S. airport market, behind Enterprise and Avis Budget Group, with a 34% and 26% market share respectively. After the acquisition, Hertz became the largest car rental business with the the highest coverage at major U.S. airports and a market share at 37%3. Lower Jet Fuel price has created a positive environment for the Airlines Industry. After reaching its peak at $3.3 per gallon in 2011, Jet Fuel price has been gradually decreasing over the past few years, and currently sits at $1.1 per gallon4. Lower Jet Fuel price allows airline companies to offer more affordable air transportation to customers. The Passenger Load factor, which measures capacity utilization of U.S Airlines Company, implies a potential increase in seat fillings from roughly 81% in 2014 to 83.6% in 2017. There is a high degree of positive correlation between the revenues of Hertz’s and those of the Airlines Industry, as identified by a 0.9 correlation. Estimated growth rate of the Airlines Industry’s sales over the next three years will be around 5%, and we expect Hertz’s revenues to grow at a CAGR of 2.5% in the next 5 years. Jet Fuel cost consists 31.5% of operating costs of the Airlines Industry. Lower Jet Fuel price will result in margin expansion and create competitive price environment in the industry. Airline ticket prices have been gradually decreasing since 2015 and we expect prices to stay at the same level in 2016.
The promising spin off of Hertz’s equipment rental business (HERC) Realizing the growth potential of the equipment rental business, Hertz’s management board decided to spin off the business in order to create a stronger growth profile and a more competitive position for each business. The company also announced the intention to maintain a target net leverage ratio of 3.5x to 4.0x5. Hertz’s equipment rental business revenue has an average growth rate of 12% over the last three years. The business is also diversifying its revenue into oil and gas exploration and extraction. Recent OPEC meetings gave no decision on restricting the amount of oil production;as a result, we expect a 5% sales growth for Hertz’s equipment rental business in 2016. Using the results from our DCF model, we create a spin off model splitting the company into its car rental and equipment rental businesses. We estimate an EV/EBITDA multiple of 8.0x for the car rental business and 10.0x for the equipment rental business based on historical comparables. Using 2016 EBITDA multiple method with a net corporate debt 3.5x for car rental business and 4.0x for equipment rental business, we value Hertz’s car rental business at $13.09 per share and equipment rental business at $3.43 per share. Details of the model can be found in the appendix.
3 Data taken from Autorentalnews research and statistic 4 IndexMundi and FactSet 5 Net leverage ratio is defined as Net Corporate Debt / Corporate EBITDA. Company guidance: http://ir.hertz.com/2015-07-16-Hertz-Completes-Financial-Restatement-Provides-2015-Business-Outlook
Jet Fuel Cost
Source: IndexMundi
Airlines EPS Growth YoY
Source: FactSet, Team estimates
US Airlines Load Factor and Passenger yield
Source: FactSet, Team Estimate U.S Airport Market Share
Source: Company data, Auto Rental Industry
Fordham Securities April, 2016 January 3, 2015
3
Valuation We collect data from SEC filings, press release, and investment notes. Based on recent guidance on April 11th, Corporate Adjusted EBITDA is roughly $1.6-$1.7B, EPS is roughly $0.95-$1.10 with effective tax rate of 37%6; these figures are in line with our estimates. We expects U.S. car rental revenue to stay flat with US Car Rental on Airport growing at 2.5% and Hertz equipment rental growing at 5% in 2016. We value the company using a DCF model together with comparables multiple. 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 assign Hertz an EV/EBITDA multiple of 7x, which translates to a target share price of $13.86.
1. WACC7: Our WACC calculation of 8.6% was calculated with the following inputs. Cost of Equity: 14.9% Cost of Debt: 4.5% Risk Free Rate: 1.7% (10 year yield) Tax Rate: 37% Expected Market Return:7.00% Post Tax Cost of Debt: 2.8% Beta: 2.5 WACC: 8.6%
2. Our DCF with perpetuity growth method analysis derives a price target of $9.75. We use a growth rate of
2% to determine this price target.
6 http://ir.hertz.com/2016-04-11-Hertz-Global-Holdings-Inc-Provides-Business-Update 7 Not including fleet debt and cost of fleet debt
Discounted Cash Flow Analysis for HERTZDollars in millions, except per share
Historical Year Ending December 28, Projected Year Ending December 28,2013 2014 2015 2016 2017 2018 2019 2020
Investment Risks Accounting standard risk: Recent accouting restatement and filling delays put a big question on Hertz’s accounting standard. In August 2015, the company withdrew its financial guidance and announced that it needed to review fiscal results from 2011 to 2013. In November of the same year, the company announced it generated $87 million less in revenues than previously thought and would restate three years’ worth of earnings8.
Price pressure risk: Hertz expects US Car Rental revenues per available car day to decline between 2.5 to 3.5 percent versus the same period last year due to pricing pressure. Large fleet size give Hertz a better advantage in scale but lower flexibility when cyclical seasonal intensify.
Car-Sharing Rentals Grow (Zipcar): Car sharing, a new model for people to rent cars more conveniently, has been expanding its footprint. Roughly 18 percent of Americans have used a car-sharing service. Substitute services including Uber and Lyft also pose a high threat to the car-rental business.
Residual risk: The percentage of “program cars” that manufacturers agreed to repurchase at a specified price or guarantee a setdepreciation rate has decreased from 48% to 30% in Hertz car rental fleet. Additionally, the decline in the value of the non-program cars causes severe residual risk for the company. Compared to Avis’s 37% program cars, Hertz faces bigger challenges.
Fuel price fluctuation: Crude oil price is down from $100 in 2014 to the present price at $40 (Apr 6th 2016), which allows Hertz to greatly reduce its fuel expense. However, major oil exporting countries are giving uncertainty signal whether they are going to further restrict oil production.
Weighted average cost of capital: 8.6% Weighted average cost of capital: 8.6%Net present value of free cash flow (b) $2,506.0 Net present value of free cash flow (b) $2,506.0
Growth rate of FCF after 2020 2.0% Exit multiple 7.0xTerminal value $11,281.9 Terminal value $14,107.8Present value of the terminal value (c) 7,475.9 Present value of the terminal value (c) 9,348.5
Enterprise Value $9,981.9 Enterprise Value $11,854.5 LESS: Net Debt (d) (e) (5,535.0) LESS: Net Debt (d) (e) (5,535.0)Equity Value $4,446.9 Equity Value $6,319.5
Diluted shares: 456.000 Diluted shares: 456.000
Equity Value Per Share (f) $9.75 Equity Value Per Share (e) $13.86
Fordham Securities April, 2016 January 3, 2015
7
Appendix 2: Spin Off Model
Car Rental 2013 2014 2015 2016 2017 2018 2019 2020
EBITDA 2016 1,315.00$ Exit Multiple 8.00 Enteprise Value 10,519.98$ Net Debt 4,601.35$ Equity Value 5,918.63$ Share Value 13.09$
Car Rental & Other OperationEBITDA 2016 258.58$ Exit Multiple 10.00 Enteprise Value 2,585.84$ Net Debt 1,034.34$ Equity Value 1,551.51$ Share Value 3.43$
Appendix 5: 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
Fordham Securities April, 2016 January 3, 2015
11
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.
Cost Current Value WeightKe 14.92% 4,180 0.39 5.84%
10 Year US Bond Yield Rfr 1.72%Expected Market Return Rm 7.00% 5.28%Calculated Beta 2.50
RM-‐RF 5.28%B(RM-‐RF) 13.2%
Kd 4.50% 6,500.00 0.61 2.74%
WACC 8.6%Tax rate 37%
CAPM
Fordham Securities April, 2016 January 3, 2015
14
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.
