Hertz Drops After Morgan Stanley Cuts Target Amid 'Unprecedented' Dynamics
Hertz (HTZ) shares are sliding Thursday after Morgan Stanley cut its price target on the stock after its earnings report Monday, with the research firm highlighting the company's increasingly fragile balance sheet and "unprecedented" dynamics within the car rental space.
MORGAN STANLEY CUTS HERTZ TARGET: Responding to "disappointing" Q1 numbers from Hertz, Morgan Stanley's Adam Jonas cut his estimates and lowered his price target to $12 from $15 while reiterating an Equal-weight rating on the stock. Assuming U.S. rental car pricing down 2.3% for the year, the analyst now expects 2017 losses per share of (63c), versus his prior forecast of $1.03 in profits, and his average EPS expectation through 2020 falls to $1.50 from $1.96. Arguing that the stock "requires a leap of faith," Jonas says there appear to be "bigger forces at work" in U.S. car rentals. Simultaneously falling prices and rising fleet costs, which he views as largely outside of Hertz' control, are "truly unprecedented," especially given the fairly healthy economic environment and "very frothy" airline trends. At this point, says Jonas, the performance of Hertz shares could hinge on the company's access to capital markets: "Specifically, its ability to continue to fund its car rental operations while terming out significant debt maturities that escalate each year in 2018, 2019 and 2020." The analyst adds that Hertz is now leveraged to "elevated levels," and its financing situation is the primary risk facing investors. Jonas notes that strategic options for the company's global business could "play a role" in the stock, though he has "no knowledge" of any such deals.
BLOOMBERG SAYS PRICING STILL AN ISSUE IN APRIL: Joel Levington of Bloomberg Intelligence said that negative pricing trends may again have impacted Avis Budget (CAR) and Hertz in April, possibly suggesting that the market remains "too saturated with excess fleet."
PRICE ACTION: Shares of Hertz are down 11.5% in afternoon trading, while Avis is down 4.5%.