Morgan Stanley Resumes Hertz Global (HTZ) at Overweight; Sees First Earnings Upgrades in Years
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Morgan Stanley resumed coverage on Hertz Global (NYSE: HTZ) with a Overweight rating and a price target of $57.00. Analyst Adam Jonas said pricing is at a bottom and urgent action on costs may trigger something that hasn’t happened in years... higher earnings estimates.
Jonas see EBITDA revisions and 12 months share price movement dominated by 2 key drivers that we see positioned in a favorable way: (1) pricing and (2) cost cutting.
The analyst HTZ pricing impacted by company specific factors that should not continue. "While the pricing environment for car rental has been unfavorable in recent quarters, HTZ´s performance has been on a significantly lower level vs. its peers," he commented. "HTZ US RAC RPD (revenue per day) fell 10% in 1Q and 8% in 2Q vs. CAR down 5% in 1Q and up 1.4% in 2Q. HTZ pricing still reflected the last throes of overfleeting, migration to new fleet management systems, changing personnel and possibly some distraction ahead of the HERC spin. This company has been through a difficult time. With the HERC spin done, we view the next 6 to 12 months as time for the healing to begin and we think it is reasonable to see this reflect itself in the form of improved pricing. When we say 'improved' we mean 'less bad' as we forecast flat YoY 4Q pricing vs. a prior year down more than 5%. For 2017, we forecast US RPD up 1.5% vs. a 2016 performance which featured a first half down the better part of 10%."
Jonas notes sensitivity of HTZ earnings to car rental pricing is extremely high, particularly post HERC spin as a 'pure play' car rental company. He notes just 100bps of incremental US pricing in each of 2017 and 2018 would take 2018 EPS forecast from $6.03 to $6.83 or 13% accretion.
On cost cuts, the analyst said they represents a significant earnings driver that is more within the company's control. "One of the most important drivers of our upgrade of HTZ to OW earlier this year was the company's communication and early execution of its aggressive cost cutting program," he said. "In the wake of the DTG acquisition, operational turmoil and management change, it is no wonder that new HTZ management have found significant areas of costs and inefficiencies to take out of the organization. At the company's capital markets day last November, it unveiled a comprehensive plan to cut between $800mm and $950mm of costs, equivalent to nearly 900bp of EBITDA margin (vs. a base EBITDA margin of around 10% in 2016). Further discussions with the company have increased our confidence that these cuts are achievable within the time horizon of 2018 to 2020."
Jonas note every $100mm of annual cost cutting is worth ~12% to their 2018 earnings forecasts.
Shares of Hertz Global closed at $49.59 yesterday.
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