Will Hertz (HTZ) Lose More Ground Post The Q1 Debacle?

Shares of Hertz Global Holdings Inc. (NYSE:HTZ) plunged 17.8% in the after-hours trading session yesterday, following the company’s dismal first-quarter 2017 performance. In fact, this Zacks Rank #5 (Strong Sell) stock has crashed 47.6% in the last six months, underperforming the Zacks categorized Transportation Services industry’s growth of 7%.

Hertz’ bearish run is mainly attributable to its disappointing past performance, as the company has lagged bottom-line estimates for three consecutive quarters now, thus instilling fears among investors about its future prospects. So, is Hertz’ stock in for further trouble?

Q1 Highlights

The company posted a quarterly adjusted loss of $1.61 per share, which was wider than the Zacks Consensus Estimate of a loss of $1.00 and also the year-ago loss of 79 cents. Results were hurt by weak sales, increased fleet investments and higher spending on tech and brand development.

On a reported basis, Hertz Global posted a loss per share of $2.69 compared with a loss of 61 cents earned in the prior-year quarter.

Total revenue slipped 3% year over year to $1,916 million, mainly due to soft revenues at the domestic and international segments. However, the company’s top line surpassed the Zacks Consensus Estimate of $1,889 million, thus marking its first beat after two consecutive misses.

The company posted adjusted EBITDA loss of of $110 million, against profit of $27 million in the year-ago period. This reflected weakness at both the segments, attributable to additional expenditure on IT systems, brand development and system enhancements. Also, fleet investments and efforts to realign vehicles dented EBITDA.

Segment Performance

Hertz 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 dropped 4% year over year at $1,353 million in the first quarter, owing to a 1% dip in transaction days and 3% decrease in pricing – as measured by Total Revenue per Transaction Day (RPD). While 2016’s Leap day largely accounted for the loss in transaction days, pricing bore the brunt of adverse consumer mix. Also, revenues were hurt by Easter holiday shifting into the second quarter this year.

Quarterly revenues for the International RAC segment came in at $411 million, down about 5% year over year, including negative foreign currency impact. Excluding currency impact, revenues dropped 4%, owing to a 4% reduction in Total RPD, somewhat compensated by a 1% improvement in transaction days. However, revenues at this segment were hampered by the absence of last year’s Leap day and 2017’s unfavorable Easter shift, alongside being weighed upon by the termination of various deals in third-quarter 2016.

Revenues for the All Other Operations segment rose 6% to $152 million. This segment mainly houses Hertz’s Donlen leasing operations.

Financial Update

Hertz, which shares space with Avis Budget Group, Inc. (NASDAQ:CAR) , ended the quarter with cash and cash equivalents of $785 million, total debt of $14,088 million and shareholders’ equity of $918 million.

Further, the company generated $498 million as cash from operating activities, while delivering negative free cash flow of $31 million in the quarter under review.

Outlook

While Hertz performance remained disappointing, the company remains focused on its turnaround plan, which keeps customers at centre stage. Further, the company remains keen on solving issues related to fleet and services, which were the main deterrents this quarter. In this regard, management remains on track to make investments in fleet, services, brand development and technology in 2017, which should help it regain its solid market position.

Stocks to Consider

Some better-ranked stocks worth considering in the same industry include Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR) and Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (NYSE:PAC) , each with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Grupo Aeroportuario del Sureste has an average positive earnings surprise of 5.7% in the trailing four quarters, with a beat in each quarter. Also, the stock has seen solid positive estimate revisions in the last seven days.

Grupo Aeroportuario del Pacífico has seen positive estimate revisions for 2017, over the past 30 days.

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