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Hertz to Buy New Fleet, Down on Financial Statements Delay

Zacks Equity Research

Shares of Hertz Global Holdings, Inc. (HTZ) dropped nearly 5% as the company announced that it does not expect to file updated financial statements anytime before mid-2015, owing to the accounting errors reported earlier.

Due to the identification of certain errors in the financial results for 2011 earlier this year, this Zacks Rank #4 (Sell) company had stated that its audit committee has directed the initiation of a complete review of its financial results for fiscal years 2011, 2012 and 2013. The financial statements for 2011 were required to be restated then.

Now, the company has announced that it also needs to restate its financial statements for 2012 and 2013, as the ongoing accounting review will have an impact on them. Consequently, Hertz stated that due to these accounting activities, it will be unable to file any updated statements before at least mid-2015 and that there is no guarantee of the process being completed by then.

The company is on track to segregate its equipment rental operations, but its plan to complete the same will be delayed until the completion of the accounting review and filing of the required statements with the SEC.

Further, the company made a series of announcements, including plans to buy a new fleet to enhance its U.S. rental car business, cost-cutting initiatives and an updated outlook for 2014.

Hertz declared that it will buy approximately 350,000 model year 2015 automobiles that is 60% above the model year 2014 number. Moreover, 25% of the newly purchased fleet will be delivered in the fourth quarter of 2014 itself. Hertz plans to sponsor this purchase with its revolving credit facilities, which were amended of late, in order to prolong maturities and offer additional growth capital.

Further, it is anticipated that 70% of the U.S. operating fleet will be risk vehicles in 2015, compared to 85% in calendar-year 2014, with the holding period for model 2014 and 2015 vehicles expected to be significantly lower than the model 2013 holding period.

Also, in an attempt to speed up its fleet transformation, Hertz raised its risk vehicle outlook for fourth-quarter 2014 by 45%, compared to its plan. As of October end, nearly 40% of the planned sales for the fourth quarter were achieved. For full-year 2014, depreciation per car rental vehicle is forecasted to be roughly $280–$300 per unit, which is high on account of the faster disposition and smaller residual value.

Moving to the company’s next announcement, Hertz intends to curtail costs by around $100 million on an annual basis, mainly by reducing its general, administrative and external strategic advisor-related costs, cutting down on its information technology and capital investments, and closing its pension plans. Hertz anticipates to achieve savings at a full run rate by 2015-end.

Moreover, Hertz provided an update on its third-quarter 2014 results. Total revenue during the quarter inched up 2% year over year to $3.1 billion. Going by segments, revenues at the U.S. Car Rental segment remained flat year over year at $1.8 billion; the International Car Rental segment revenues increased roughly 3% to $795 million; the Worldwide Equipment Rental segment also witnessed a 3% rise in revenues to $415 million and all other operations segment revenues advanced 9% to $145 million. These segments formed 57%, 25%, 13% and 5% of the total revenue, respectively.

Finally, Hertz provided an outlook for 2014. Including the effect of the adjustments made with respect to the accounting review, the company envisions its corporate earnings before interest, taxes, depreciation and amortization (“EBITDA”) for 2014 to be in the range of $1.30–$1.45 billion. Also, the company stated that 2014 and 2015 should not be considered as the base for its future results owing to the exceptional costs incurred for the ongoing accounting and financial reviews.

Management stated that with the aforementioned efforts underway, the company aims to enhance its financial and operational efficiencies, position itself well among competitors, increase consumer satisfaction and maintain its focus on high-return opportunities.

Better ranked stocks in the same sector include CoreLogic, Inc. (CLGX), with a Zacks Rank #1 (Strong Buy), Core-Mark Holding Company, Inc. (CORE) and WageWorks, Inc. (WAGE), each carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on HTZ
Read the Full Research Report on CORE
Read the Full Research Report on CLGX
Read the Full Research Report on WAGE

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