Hertz $HTZ is on the brink of bankruptcy as hundreds of airports all around the world are closed and the company is unable to repay some of its coming contractual obligations.
66% of the revenues of Hertz in 2019 came from airports and according to the numbers from Avis Budget Group, the main competitor or Hertz, revenues from airports so far this year is down by 90% and off airports by 60%. Usually, the best quarter for Hertz and for Avis is during the summer months, that is, the third quarter. This is yet to come and we cannot really expect any big recovery.
The problems for Hertz started, however, well before this pandemic as the revenues have been stagnant for years with the rise of ridesharing services such as Uber and Lyft.
The company currently has $17 billion in long-term debt and this year they have $2.8 billion to repay. It is unlikely that they will be able to do that. The only way they can escape bankruptcy is if they sell their cars. But this causes a new problem as the market will be flooded with second hand cars and the prices of these cars will go down and the current cars that they own will be depreciating faster. It is a vicious cycle, the more car they sell, the less money they can make by selling cars. And what happens when things get back to normal? They will be destroyed by the competition.
A Chapter 11 Bankruptcy might be the best option as they will be able to negotiate with their creditors and not pay part of the debt. Hertz recently had a change in management with a new CEO, Paul Stone. It is also important to note that 39% of Hertz is owned by activist investor, Carl Icahn. Carl Icahn increased his holdings in Hertz by 25% last quarter. Carl Icahn is known to have done spinoff of troubled companies before to prevent the main business from going bankrupt. Is this the plan for Hertz? It is hard to say.
At the current valuations of $421 million, Hertz is trading under its book value of $1.3 billion. But we need to be careful with these numbers as this is not the liquidation value of Hertz. Hertz has intangible assets and goodwill. The tangible book value or liquidation value of Hertz is about negative $3 billion. The only way to bring the liquidation value positive is by converting some of the debts into equity, that is, restructuring after a bankruptcy.
I don't think that Hertz is a good investment right now. We will need to wait for the bankruptcy first. If they file for bankruptcy, the stock price will most likely crash and we may be able to buy at an even cheaper price with a positive liquidation price. If they don't file for bankruptcy, I don't see any catalyst that could make the stock price go higher in the long-term. It is better to wait on this one, there are too many uncertainties ahead.
You can read the full analysis of Hertz on my research partnership: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/16547456