Is A Proxy Fight On The Horizon For Hertz?

Hertz Global (HTZ) could be seeing some changes soon. Activist investor Carl Icahn announced that he may seek board representation and hedge fund Fir Tree Partners has called for the removal of Hertz CEO Mark Frissora – all on the same day that Hertz filed an 8-K withdrawing its financial guidance for the year. Hertz’s share price took a major hit in response, opening at just $27.55 on Wednesday after closing at $31.56 the day before.

INVESTMENT THESIS

Shares in Hertz rebounded somewhat on Thursday, hovering around $30, but things could change quickly for the $13.48 billion market cap rental agency chain. Hertz is a weak company – even before all this, its one year target estimate is just $28.78 – but a change in management could help the company turn things around. Icahn’s involvement is a strong benefit to the cause. Buy in low now for long term growth.

A VERY BUSY WEEK AT HERTZ

Icahn disclosed Wednesday that he had an 8.48% stake in the rental company and may seek board representation. Icahn said in hisregulatory filing related to the same that he believes Hertz to be undervalued and “to have discussions with representatives of [Hertz’s] management and board of directors relating to shareholder value, accounting issues, operational failures, underperformance relative to its peers and the Reporting Persons’ lack of confidence in management.”

On the same day, Hertz said that it was withdrawing financial guidance for the fiscal year in a 8-K filed with the SEC. According to that filing, Hertz said that it “expects to be well below the low end of its 2014 guidance due to operational challenges in the rental car and equipment segments as well as the associated costs related to the accounting review previously disclosed. These ongoing challenges include:

  • Record level, industry-wide OEM vehicle recall activity, which has constrained the Company’s U.S. fleet available for rent;
  • Significantly higher-than-expected adjusted direct operating expense in U.S. rental car;
  • Issues and delays associated with the installation of its Enterprise Resource Planning (ERP) and counter systems, which have adversely impacted anticipated synergy capture flowing from the Dollar Thrifty acquisition; and
  • Continued soft demand in the equipment rental business segment.

In response, Fir Tree Partners, which owns a 3% stake in Hertz, issued a statement calling for the removal of Frissora. “The CEO has had some serious missteps, and it’s time for a change,” Scott Tagliarino, a spokesman for Fir Tree Partners, said. “We believe Hertz has an incredible brand and an opportunity to show leadership in the car rental industry.” The hedge fund issued a second statement on Thursday, saying that Mr. Frissora “has completely lost credibility.”

NOT ALL BAD

In addition, Hertz is taking a second look at its books. “As previously disclosed, the Company will restate its 2011 and revise its 2012 and 2013 financial statements. The Audit Committee of the Company’s Board of Directors has directed the Company to conduct a review of the financial records for fiscal years 2011, 2012 and 2013 and their impact, if any, on 2014. This review may identify additional errors and require Hertz to make further adjustments to the 2012 and 2013 financial statements, explains Hertz in its 8-K filed earlier this week.

“If further errors to the 2012 and 2013 financial statements are determined to be material errors individually or in the aggregate, Hertz will need to also restate and withdraw reliance on those financial statements, and the Company would need to timely disclose this. To date, the Company has not changed its conclusion on 2012 and 2013, but can give no assurance that it may not reach a different conclusion.”

These issues could indicate a weak company, or at least certainly one in which you may not want to put your money, but it’s not all bad. Hertz has had strong sales growth. Its last-stated quarterly revenue grew 10% quarter over quarter, outpacing the industry average of 8.8%. And this growth can be seen in Hertz’s bottom line. The company’s annual earnings per share increased to 76 cents from 54 cents in the previous year, and the current analyst estimate is $1.67 for the current year and $2.13 for 2015.

Looking at the second quarter, the company is seeing growth in the second quarter 2014 as well. “Total U.S. rental car revenue increased 4% in the 2014 second quarter compared to the 2013 second quarter,” and “for International rental car, revenue grew 7% including currency effects in the 2014 second quarter compared to the 2013 second quarter.” The gains in 2Q14 were not as strong in equipment rental, the company noted, “Worldwide equipment rental segment total revenue increased 1% including currency effects in the 2014 second quarter compared with the prior year, impacted in part by a lower level of new equipment and parts sales. Rental revenues increased 3% including currency effects.”

Hertz could be undervalued. At its current share price, the company has a forward price to earnings ratio of just 14, while rival Avis (NASDAQ:CAR) is priced at 18 times its future earnings.

TAKEAWAY

Hertz needs some work – and a change in management may help. This is a precarious time for the rental agency but Icahn’s involvement and Fir Tree’s insistence on managing accounting errors and managerial missteps is a step in the right direction. Recovery won’t happen overnight, but a long position could be justified.