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Can Hertz Sustain Long-Term Growth?

Hertz Global Holdings, Inc. (HTZZ) is an American car rental company that owns popular brands such as Hertz, Dollar, and Thrifty. The pandemic had a significant impact on Hertz’s rental business, resulting in the company declaring bankruptcy last year due to global lockdowns.

The recovering economy, as well as investments from Knighthead Capital Management and Certares Management, helped Hertz emerge from Chapter 11 bankruptcy on July 1. This allowed the company to resume trading on U.S. markets under a new ticker symbol.

The company posted strong financial results for the second quarter, benefiting from a strong recovery of leisure travel demand. In addition, the shortage of vehicles for sale pushed used car prices higher in the United States.

Despite the very promising signs, I remain neutral on Hertz stock because of the structural risks faced by the company due to the rise of the ride-hailing industry. (See Analysts’ Top Stocks on TipRanks)

Hertz is Enjoying Macroeconomic Tailwinds

Hertz reported $1.9 billion in revenue for the second quarter of 2021, up 62% quarter-over-quarter and 125% year-over-year. The company ended the quarter with $300 million in net cash, excluding debt backed by its vehicle fleet. The coming quarter is expected to be the best in its recent history thanks to a vehicle shortage that has pushed rental car prices up and the improving prospects of the leisure industry.

The rental vehicle industry has performed extraordinarily well this year, in tandem with the robust rebound of travel in major travel destinations like the United States and Europe.

In addition, the supply constraints in the automobile industry, which are likely to persist until 2022, have boosted the prices of used vehicles as well. This has allowed Hertz and other rental car companies to unload their fleets at highly favorable prices and maintain their profitability.

Hertz’s stock has risen in recent weeks, boosted by the confidence about the rental vehicle market’s health and the appointment of Mark Fields, the former CEO of Ford Motor Company (F), as the interim CEO.

In the second-quarter earnings call, the company’s management also stated that it plans to re-IPO with an investor roadshow and relist common shares on a major U.S. stock exchange by the end of this year.

According to Research and Markets, the global car rental market was valued at $86 billion in 2020. It is predicted to reach $131 billion by 2026, growing at a compound annual growth rate of over 7%.

Commuters’ preference for easy and cost-effective ways of personal transportation is fueling the growth of this industry. Urbanization, greater smartphone usage, higher internet penetration, rising costs of vehicle ownership, government initiatives to reduce traffic for environmental reasons, and the development of autonomous vehicles are all key factors driving the use of rental car services higher.

Given the positive industry outlook, Hertz is likely to report robust earnings growth in the coming quarters, which in return is likely to trigger a rally in its stock price.

Although Hertz is well-positioned to recover from pandemic-related woes, the company faces stiff competition from ride-hailing giants such as Uber Technologies, Inc. (UBER) and Lyft Inc. (LYFT). Both of these companies had pushed the rental car industry into a corner before the pandemic by slowly gaining market share. Therefore, it would be reasonable to assume that this trend will continue in the long run.

Smart Score Rating

Many Wall Street analysts abandoned their coverage of Hertz once the company filed for bankruptcy. Therefore, we’ll take a look at TipRanks’ smart score rating system instead. The company has a Smart Score of 5 out of 10, making it a neutral rating. This is based on blogger opinions, TipRanks investor sentiment, and analyst ratings (there is currently only one analyst).

Takeaway

Hertz is well-positioned to benefit from the increase in used car prices. In addition, the company has quickly captured market share from the growing demand of travelers who are hitting the roads once again.

Although the outlook has improved, competition may cause Hertz’s target market to decrease significantly in the coming years, which means Hertz has a long way to go to secure the long-term sustainability of its earnings.

At the time of publication, Dilantha De Silva owned shares in Uber Technologies, Inc.

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