Why did Appaloosa exit Hertz Global

Market Realist

Appaloosa Management's positions in 4Q 2013 (Part 6 of 8)

(Continued from Part 5)

Hertz Global Holdings, Inc. (HTZ) was a 0.53% position that was eliminated last quarter by Appaloosa. The position was initiated in 2Q 2013.

Shares surged in December after the company saw activist interest with Dan Loeb’s Third Point reportedly buying a stake in Hertz. The car rental company adopted a one-year shareholder rights plan at the end of December last year due to “unusual and substantial activity” in its shares. Unconfirmed reports also said that activist investor Carl Icahn has built up a stake that prompted Hertz to adopt the poison pill. Icahn denied owning the stock. Media reports speculated that the activists might push Hertz to spinoff or sell its construction equipment rental business. The company has previously faced calls to divest the business and focus on car rentals. Analysts believe the sale of the equipment rental business would improve the company’s free cash flow profile.

Car rental stocks rallied last year, mainly due to increasing demand for rental cars in the business and leisure sectors. The segment also saw a consolidation in 2013, with Hertz rival Avis Budget Group (CAR) buying Zipcar and Payless Car Rental, while Hertz acquired Dollar Thrifty.

For 3Q 2013, Hertz reported worldwide revenues of $3.1 billion, an increase of 22.0% year-over-year but profits fell 12% from a year ago. U.S. car rental revenues for the quarter increased 32.6% primarily due to Dollar Thrifty, which the company acquired on November 19, 2012. International car rental revenue grew 9.7%. Revenues from worldwide equipment rental for the third quarter were $401.8 million, up 10.7% year-over-year.

Hertz saw flat year-over-year growth in its core airport rental service. The company said on the earnings call that while pricing remains strong, airport volume fell short of expectations. Transaction days fell nearly 3% year-over-year in 3Q versus internal forecast, which increased 4%. Fleet efficiency also declined due to the divestiture of Advantage brand as well as an unusually high amount of fleet subjected to manufacturer recalls. The company indicated on the call that Advantage is planning to file for bankruptcy and has alleged Hertz’s involvement in its liquidity issues.

In terms of outlook for equipment rental, Hertz expects continued year-over-year price and volume improvement. In Europe, for 4Q13, volume and pricing trends remain positive. But efficiency is expected to be impacted by an additional 26,000 recalled vehicles, as well as the excess fleet. The company said its 2013 transition efforts will continue into 2014, but fleet efficiencies will gradually improve as Dollar Thrifty fleet synergies come onstream. The board approved a share repurchase program of up to $300 million on the back of weakness in the stock and the exceptional growth outlook.

MKM Partners analyst stated the catalysts in 2014 for HTZ included a robust free cash flow and share repurchase initiatives, activist shareholder involvement, price increases, and integration of the Dollar Thrifty fleet. The stock was up almost 70% in 2013.

Continue to Part 7

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