Hertz (HTZ) Down On Q3 Earnings Miss, 2016 Guidance Cut

Shares of Hertz Global Holdings Inc. (NYSE:HTZ) tanked nearly 31% in the after-hours trading session on Nov 7 as the company’s third-quarter 2016 earnings and sales lagged expectations. Further, a lowered full-year 2016 outlook due to persistent weakness in the company’s car rental business led to the slump in the stock price.

Quarterly adjusted earnings plunged 21% year over year to $1.58 a share and substantially missed the Zacks Consensus Estimate of $2.81. Results were hurt by lower-than-expected rental volumes as well as higher operating and administrative expenses. Further, a substantial depreciation adjustment for its rental vehicles in third-quarter contributed to the decline.

On a reported basis, Hertz Global posted earnings per share of 49 cents compared with $2.60 per share earned in the prior-year quarter.

Total revenue slipped 1.3% year over year to $2,542 million due to soft revenues at the U.S. and International rental car segments, coupled with unfavorable currency movements. Additionally, the company’s top-line lagged the Zacks Consensus Estimate of $2,567 million.

Corporate earnings before interest, taxes, depreciation and amortization (EBITDA), on an adjusted basis, declined 23.5% to $329 million, with the margin contracting 380 basis points (bps) to 12.9%.

Segment Performance

Hertz now reports under U.S. Rental Car ("U.S. RAC"), International Rental Car ("International RAC") and All Other Operations segments.

Revenues for the U.S. RAC segment fell 2% year over year to $1,707 million in third-quarter due to a 3% decrease in pricing or Total Revenue per Transaction Day (“RPD”), offset by a 1% rise in transaction days. However, pricing represented a 5 percentage point improvement from the preceding quarter.

Quarterly revenues for the International RAC segment came in at $683 million, down 1% year over year, including negative foreign currency impact. Excluding currency impact, revenues inched up 1%, attributable to a 2% increase in transaction days neutralized by a 1% drop in Total RPD.

Revenues for the All Other Operations segment increased 2% to $152 million. This segment mainly houses Hertz’s Donlen leasing operations.

Financial Update

The company ended the third quarter with cash and cash equivalents of $1,430 million, total debt of $14,863 million and shareholders’ equity of $1,573 million.

Outlook

The company anticipates fourth-quarter 2016 results to bear similar impacts as the third quarter, particularly higher depreciation rate adjustments on vehicle due to lower residual values. Hertz Global has lowered its outlook for full year 2016. Further, it expects the weak trends in its car rental business to continue throughout 2016, thus impacting results.

The company remains on track to reach its cost reduction target of $350 million for 2016, despite the lag in the third quarter due to timing issues.

For 2016, the company now expects adjusted corporate EBITDA in the range of $575–$625 million compared with the previous guidance of $850–$950 million.

The company anticipates domestic RAC revenue to decline in the 2–3% range, against a flat to down 1.5% forecast provided earlier. Further, U.S. RAC net depreciation per unit per month is projected in the band of $295–$300 million versus $290–$300 million guided previously. Meanwhile, U.S. RAC fleet capacity is expected between -1% and -1.5% compared with the prior guidance of -3% to -2%. Net non-vehicle capital expenditure for 2016 is now estimated in the range of $75–$85 million, against the prior expectation of $125–$150 million.

The company expects non-vehicle cash interest expense of $280–$285 million in 2016 compared with the August forecast of $280–$290 million. Additionally, free cash flow guidance for the year has been slashed to fall within a range of $250–$300 million from the earlier estimate of $500–$600 million.

Finally, Hertz substantially cut its adjusted earnings per share guidance to a range of 51–88 cents per share from $2.75 to $3.50 anticipated earlier. Earnings guidance for the full year is based on expected shares outstanding of 85 million and an effective tax rate of 37%.

Zacks Rank

Hertz currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include Grupo Aeroportuario del Centro Norte S.A.B. de C.V. (NASDAQ:OMAB) and Matson Inc. (NYSE:MATX) , each carrying a Zacks Rank #2 (Buy). Another favorably-ranked stock in the broader Transportation sector is Genco Shipping & Trading Ltd. (NYSE:GNK) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Grupo Aeroportuario, with a long-term earnings growth rate of 10.6%, has witnessed an uptrend in the Zacks Consensus Estimate for 2016 in the last 30 days.

Matson has jumped 25.7% in the past six months. The stock has a long-term earnings growth rate of 5% and the company’s estimates have been trending up over the past 30 days.

Genco Shipping has a record of positive earnings surprises in the recent quarters, with an average beat of 5.6% in the trailing four quarters. Moreover, the company has an Earnings ESP of +10.58%.

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