Hertz Global roundtrips back to the station. Hail or bail?

Rental car giant Hertz Global Holdings Inc. (NASDAQ: HTZ) emerged from Chapter 11 in July 2021 to re-list on the NASDAQ  on Nov. 9, 2021, with its shares fluctuating between $25.40 and $28. The post-pandemic travel boom sucked in hopeful investors, but shares steadily sold off for the next two years down to the $8 range.

Its latest earnings showed some areas of improvement. However, shares still sold off on its electric vehicle (EV) rental strategy as the company tries to best competitors like Avis Budget Group Inc. (NASDAQ: CAR) as the first mover in EV rentals. Buying and renting out Tesla Co. (NASDAQ: TSLA) EVs to Uber Technologies Inc. (NASDAQ: UBER) drivers has been a cost nightmare, which impacted its margins. This disaster is something that has repeated itself in the past. Just ask Uber.

Fool me once, shame on you, Uber Rent.

Uber launched its rental program, Uber Rent, in 2015. The model was simple. Buy 40,000 cars and lease them to Uber drivers at $225 to $300. In exchange, Uber drivers had no mileage limits or maintenance expenses other than oil changes and could drive them as much as possible to earn money. Hertz would rent them out to drivers as the middleman. Uber would deduct the rental fees directly from Uber driver’s weekly payouts.

Win-win for all? Not.

It was a theoretical win-win situation. Uber would collect rental fees and fares while drivers would have a car and opportunity to earn money. Hertz would make their cut from the rentals. Ultimately, Uber could put the used cars up for resale at the end of its lifecycle and recoup some money. Uber figured they'd lose around $500 per car but more than makeup for it in fees and fares. Or so they thought.

Mileage, mileage, mileage

Uber didn't realize two things. Number one, mileage is the key factor in determining a car's resale value. Number two, Uber drivers would drive their rental cars into dust. Without mileage, Uber drivers regularly drove over 1,000 miles per week to make their rental payments and earn some money after expenses like gas, car washes and oil changes.

This wear and tear caused their rental cars to depreciate exponentially faster. Instead of losing $500 per car, Uber lost an average of $9,000. Uber is no stranger to losing money. They are pros. However, they cut their losses in 2019, shuttering the program.

Fool me twice, shame on me, Hertz.

In November 2021, Hertz made a deal to purchase 100,000 EVs from Tesla to rent them out to customers and Uber drivers. The model was similar to Uber Rent, but this time, Hertz would purchase the cars and lease them out to Uber drivers for $334 weekly and collect their fees. The $334 includes insurance and maintenance with no mileage cap.

However, the same pitfalls occurred again. Hertz discovered that Uber drivers drive a heck of a lot of miles, especially with dwindling rates per mile payouts. Uber drivers have to drive more miles to make the same money. All that driving inevitably results in more damage.

Maintenance costs were cheaper, but repair costs turned out to be much higher than expected, while EV resale values plummeted lower than expected. Tesla's price cuts didn't help, causing Hertz to record even higher depreciation costs. While maintenance is cheaper, the collision and repair costs for EVs are double those for gas-operated vehicles.

Impressive surface results

On Oct. 26, 2023, Hertz released its third-quarter 2023 results for September 2023. The Company reported an adjusted earnings-per-share (EPS) profit of 70 cents versus consensus analyst estimates for 68 cents, a 2-cent beat. GAAP net income was $629 million or 92 cents per diluted share.

Adjusted net income was $230 million. Adjusted corporate EBITDA was $359 million, a 13% margin. Revenues rose 8.3% year-over-year (YOY) to $2.7 billion, matching analyst estimates. It was the highest quarterly revenue for the company. Hertz ended the quarter with $1.7 billion in liquidity, including $594 million in unrestricted cash.

Trouble lurks beneath

Monthly revenue per unit was $1,596, benefiting from 83% utilization, up 320 bps relative to the prior quarter. Monthly fleet depreciation per unit was $282, up 52% YoY, due to net vehicle disposition gains, which were elevated in 2022. The total net debt has grown to $15.4 billion from $6 billion since it emerged from Chapter 11. This caused operating income to plummet by 28% and ballooned interest expense as a percentage of operating income to 49%. Hertz has spent $3.1 billion under its stock buyback program but its average cost is around $19 per share, almost twice its current trading price.

EV dynamics

Rideshare growth volume has risen 50% YoY, including EVs and gas power vehicles. EV depreciation resulted in lower EV residual values from price reductions by OEMs, increasing depreciation expense and negatively impacting salvage cost value. Hertz reported an elevated incidence of damage and collision, resulting in higher repair costs, which impacted results. They are re-underwriting the rideshare cohort and activated a comprehensive damage and collections program.

They noted that an oversupply of EVs in revenue per available car (RAC) impacted its revenue per used car (RPU). Due to Uber drivers having more accidents, Hertz had shifted more of its EV fleet to regular rentals for leisure and commuters. However, that left an oversupply of EVs with softening demand. They will be shifting more EVs to rideshare in Q4 2023. They expect to underwrite drivers and remediate causes of damage better. No details were provided on how they would do this.

EV rideshare rental model catch-22

There is an inherent problem with the rideshare rental model. EV rentals to rideshare drivers who have to deal with falling pay schedules by driving more don't seem practical. Suppose Hertz charges drivers more, and Uber continues to lower its pay schedules. In that case, drivers will have to drive more, which raises the miles driven, causing more depreciation and higher collision and damage. Educating drivers with "easy-to-use educational tools on EV functionality" doesn't appear to be a lasting solution.

Hertz CEO Stephen Scherr commented, “To that end, we are pulling all controllable levers to bring the incremental cost down. We nonetheless remain committed to our long-term strategy to electrify the fleet. We believe in the value of being a first mover. Electric vehicles opened the door to our growing presence in rideshare where electrification is a fast-approaching requirement, not merely an option and a channel where we are uniquely positioned.”

Hertz Global Holdings financials can be found on MarketBeat. Hertz Global Holdings peers and competitor stocks can be found with the MarketBeat stock screener.

Daily Descending Triangle and Bear Flag

The daily candlestick chart on HTZ formed a descending triangle pattern followed by a bear flag breakdown. The descending trendline commenced on March 6, 2023, after peaking at $20.48. The flat-bottom trendline formed at $14.95. HTZ initially attempted to break out of the triangle on July 5, 2023 but fell back down through the descending trendline on August 15, 2023.

The HTZ breakdown formed on Sept. 21, 2023, sending shares to $10.25 before forming the daily market structure low (MSL) buy trigger at $11.42. The higher highs and higher lows formed a bear flag that rejected the MSL trigger, causing the downtrend to resume and accelerate on its Q3 2023 earnings release. The relative strength index (RSI) fell back under the oversold 30-band to the 19-band. Pullback support levels are at $7.74, $6.50, $5.40 and $4.55.

The article "Hertz Global roundtrips back to the station. Hail or bail? " first appeared on MarketBeat.