Hertz Faces Tough Road Ahead: High Fleet Costs, Liquidity Concerns Trigger Downgrades

Hertz Global Holdings, Inc HRZ reported first-quarter FY24 sales growth of 1.6% year-on-year to $2.08 billion. Adjusted EPS of $(1.28) missed the analyst consensus estimate of $(0.44).

The following are the reactions of various analysts regarding the company's first-quarter earnings.

Goldman Sachs – Reiterate Sell, slash price target from $7 to $4

Analyst Lizzie Dove noted that Hertz’s 1Q EBITDA miss has heightened investor concerns, particularly regarding HTZ's First Lien Covenant and its minimum liquidity requirement, which are now increasingly in focus.

Though management expects to refresh the fleet over the next year, the analyst believes cash flow management around the fleet will be the key lever for the company to comply with its covenant requirement.

The analyst's model expects trends to get worse before they get better, with $400 million free cash flow burn in FY24 and does not see a clear catalyst path over the next 12 months.

Vehicle depreciation in 1Q24 increased $588 million, or $339 on a per-unit basis, from 1Q23 and within the $339 per unit increase in the quarter, the company noted that $195 million was related to EVs held for sale.

Of the 20,000 electric vehicles, 10,000 have been sold and the carrying value of the remaining 10,000 have been written down to fair value less costs to sell. Also HTZ decided to sell an additional 10,000 EVs, noted the analyst.

Until there are further proof points on HTZ's ability to turnaround operations and execute on its cost savings strategy, the analyst does not believe HTZ will have sufficient ability to invest meaningfully in the fleet.

BofA Securities – Downgrade to Underperform from Neutral, slash price target from $9 to $3

According to analyst John P. Babcock, the under performance of HTZ in 1Q was driven by higher fleet costs, which are unlikely to meaningfully subside in the near-term.

Liquidity is also an increasing concern among investors, as HTZ has an older fleet that will need to be refreshed at a time when used vehicles are dropping and new vehicle prices are softening only modestly, noted the analyst.

The analyst said fleet costs are likely to remain above historical levels as used vehicle prices will continue trending lower and that electric vehicle prices are likely to decline further.

With the sizable declines in used vehicle prices, HTZ is collecting fewer proceeds from the sales, the analyst observed.

Rising interest costs in 2024 will limit a potential earnings recovery in 2025, the analyst said.

Morgan Stanley- Reiterate Equal-weight, $9 price target

Analyst Adam Jonas said HTZ posted a surprise negative EBITDA driven by DPU of $592 vs. $342 of Morgan Stanley's expectation as new management appear to be taking more of the up-front pain as they catch up on long overdue mark-to-market on the rental fleet.

Hertz stock lost over 70% in the last 12 months. Investors can gain exposure to the stock via iShares Core S&P Mid-Cap ETF IJH and Invesco S&P MidCap 400 Pure Value ETF RFV.

Price Action: HTZ shares were down 5.56% to $4.42 on Friday.

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