Hertz’s stock price has taken a beating over the past six months, shedding 50.1% of its value and falling to $2.06 per share. This may have investors wondering how to approach the situation.
Is now the time to buy Hertz, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Hertz Will Underperform?
Even with the cheaper entry price, we don’t have much confidence in Hertz. Here are three reasons we avoid HTZ, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Hertz’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2.2% over the last two years. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Over the last few years, Hertz’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Hertz’s $22.06 billion of debt exceeds the $1.30 billion of cash on its balance sheet. Furthermore, its 9× net-debt-to-EBITDA ratio (based on its EBITDA of $2.30 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Hertz could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Hertz can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Hertz, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 56× forward EV-to-EBITDA (or $2.06 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Like More Than Hertz
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