Cyclical Pressure, Pricing Weakness To Set Back Hertz, Morgan Stanley Says

If things go right for Hertz Global Holdings Inc HTZ, bulls could celebrate a $34 valuation. If things go wrong, bears are looking at a $2 stock, according to one analyst team.

The Rating

Morgan Stanley analysts Adam Jonas and Armintas Sinkevicius maintained an Underweight rating on Hertz with a $15 price target.

The Thesis

Morgan Stanley said record high prices in used vehicles “saved” third-quarter results, but it remains concerned about rising finance costs, secular pressures and weakness in rental car pricing.

“We continue to believe HTZ confronts substantial secular problems in car rental manifesting in slower growth and cost headwinds for depreciation and cost of funds,” the analysts wrote, noting the current peak of the used car cycle. “We would use the recent stabilization of the stock price as an opportunity to reduce exposure.”

The analysts raised their 2019 bottom-line estimates from 30 cents to 34 cents but cut their 2020 forecasts by the same amount. The rate is expected to nearly halve between 2020 and 2021 amid greater cyclical pressure.

“We see an investment in HTZ shares as a relatively full-priced call option on the strategic value of HTZ’s physical capacity to maintain a mega fleet of vehicles at a time when strategic interest in ride sharing, data capture, and fleet management may be elevated,” the analysts wrote. “At the same time, we also see an investment in HTZ as a put option on a number of cyclical and secular pressures that we believe are currently not priced into consensus forecasts or sentiment.”

The rental-car company is highly exposed and levered to the peaking used car and auto credit markets.

Price Action

At time of publication, shares were down 2 percent at $14.57.

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