“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
On July 1, 2016, the old Hertz Global Holdings Inc. set up its car rental subsidiary as a separate firm (also called Hertz Global Holdings, New York symbol HTZ). It then handed shares in that new company to its investors. After the spinoff, the remaining equipment rental business changed its name to Herc Holdings and consolidated its shares on a 1-for-15 basis.
Since the split, Hertz has struggled and the stock is now down about 50%. However, Herc is up over 80%, and we feel it could go higher.
HERC HOLDINGS INC. $65(New York symbol HRI; Manufacturing & Industry sector; Shares outstanding: 28.4 million; Market cap: $1.8 billion; No dividends paid; Takeover Target Rating: Medium; www.hercrentals.com)rents out and sells a wide range of industrial equipment such as forklifts, bulldozers, and power generators. It distributes those through its 275 company-owned locations in the U.S. and Canada.
Originally began operating in 1965 as Hertz Equipment Rental Corporation (or “HERC”).
Customers include contractors (34% of rental revenue); industrial clients (30%); governments (18%); and other (18%).
U.S. supplied 88% of its 2017 revenue.
For Herc’s first full year as a separate firm, its revenue rose 12.8%, to $1.75 billion in 2017 from $1.55 billion in 2016. That’s mainly due to higher volumes and rental rates. It earned $160.3 million, or $5.60 a share in 2017. However, that figure included a $207.1 million gain due to changes to the U.S. tax code as well as a $29.7 million writedown. In 2016, Herc lost $19.7 million, or $0.70.
As of December 31, 2017, the company held cash of $41.5 million, or $1.47 a share. Its long-term debt was $2.1 billion, which is a high 1.2 times its market cap.
That level of debt adds risk. As well, the stock trades at a high 59.1 times its 2018 earnings forecast of $1.10 a share. However, the equipment rental business in North America continues to grow roughly 5% annually. Herc’s $136.1 million in tax loss carryforwards will also save it from paying U.S. federal taxes for the next five years.
Herc Holdings is a buy for aggressive investors.
HERTZ GLOBAL HOLDINGS INC. $21(New York symbol HTZ; Consumer sector; Shares outstanding: 84.1 million; Market cap: $1.8 billion; No dividends paid; Takeover Target Rating: Medium; www.hertz.com)rents cars and trucks under the Hertz, Dollar and Thrifty banners at 10,200 locations in over 150 countries. Through its Donlen business, it also provides vehicle leasing and fleet management services. The U.S. accounts for 75% of its revenue.
Hertz’s revenue declined from $10.8 billion in 2013 to $10.5 billion in 2015. Revenue fell again to $8.8 billion in 2016 following the spinoff of Herc. Profit was unchanged for 2017, as lower revenue at the company’s U.S. car rental unit offset international gains for Hertz.
The company’s earnings have been erratic. In 2013 profit was $3.80 a share (or a total of $346.2 million), but fell to $0.90 a share (or $82 million) in 2014. Earnings per share recovered to $3.00 (or $273 million) in 2015, although a writedown of Hertz’s European business led to a loss of $5.65 (or $474 million) in 2016. Gains related to U.S. tax reform lifted 2017 earnings to $3.94 a share (or $327 million).
Hertz ended 2017 with cash of $1.08 billion, or $12.90 a share. Its total debt was $14.9 billion. However, car loans backed by the vehicles themselves account for $10.5 billion of that. The company’s non-vehicle debt of $4.4 billion is still a high 2.4 times Hertz’s market cap.
The company should further gain from the improving U.S. economy and lower tax rates. However, ride-sharing services like Uber and Lyft continue to cut into rental car demand. Ride-sharing clients don’t have to worry about parking, navigation, refuelling vehicles or breakdowns.
U.S. tax reforms will probably cause Hertz to lose $0.74 a share in 2018. However, it could earn $0.69 in 2019.
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