Quiver Quantitative - Hertz (HTZ) is making a significant strategic shift by selling a third of its U.S. electric vehicle (EV) fleet, citing weak demand and high repair costs. This move marks a departure from the company's earlier enthusiasm for EVs, exemplified by its 2021 announcement to purchase 100,000 Tesla (NASDAQ:TSLA) vehicles. Hertz plans to offload 20,000 EVs throughout 2024 and will record a non-cash charge of approximately $245 million in its fourth-quarter results, reflecting incremental net depreciation expense. This decision comes amidst a broader slowdown in EV sales growth in the U.S., which only rose by 1.3% in the final quarter of 2023.
The decision to reduce its EV fleet is influenced by the elevated costs associated with these vehicles, as acknowledged by Hertz CEO Stephen Scherr. The company's shares dropped 4.3% following this announcement, reflecting investors' reactions to the shift in strategy. Hertz's move also casts doubt on the timeline for completing its agreements to buy 175,000 EVs from GM (GM) and another 65,000 from Polestar (NASDAQ:PSNY), with Scherr indicating that these purchases may take much longer to fulfill. Bloomberg Intelligence analyst Jody Lurie predicts that this strategic reversal could boost Hertz's free cash flow by $250-300 million in 2024-25, improving corporate EBITDA.
Market Overview: -Hertz slams the brakes on its electric vehicle ambitions, announcing the sale of 20,000 EVs and a shift back towards gas-powered cars. -Weak demand, high costs, and Tesla's price cuts fuel the dramatic reversal, mirroring a broader US electric vehicle slowdown. -The rental giant eyes $245 million in non-cash charges and potential free cash flow boost from the move, but faces growing pains amidst its strategic reshuffle.
Key Points: -Hertz's 2021 Tesla deal and ambitious EV goals give way to reality, revealing challenges in profitability and consumer preferences. -High repair costs and depreciation for EVs, coupled with declining demand, paint a stark picture for the rental giant's electric fleet. -The future of lucrative rental agreements for EVs hangs in the balance, with General Motors (NYSE:GM)' affordable EV lineup offering a potential lifeline. -Hertz's about-face reflects the evolving US automotive landscape, with concerns about cost and practicality tempering initial EV enthusiasm.
Looking Ahead: -Hertz's strategic pivot towards gas-powered cars raises questions about the long-term viability of EVs in the rental market. -Investor focus shifts to Hertz's ability to manage the sale, generate additional cash flow, and navigate the uncertain future of electric car demand. -General Motors' role in providing Hertz with potentially profitable EV options becomes crucial in determining the success of the revamped strategy. -The broader US electric vehicle market faces a reckoning, with affordability, accessibility, and infrastructure remaining key hurdles to overcome.
In place of EVs, Hertz plans to invest in gas-powered vehicles, aiming to better align its fleet with expected consumer demand. This pivot challenges the company's prior strategy of banking on EVs, which were expected to command higher rental prices and retain value. However, recent price cuts by Tesla (TSLA) and slowing EV sales growth have diminished the value of Hertz's EV fleet and cast uncertainty on their appeal in the used-car market. The company is also interested in GM’s upcoming affordable EV models, such as a future redesign of the Chevrolet Bolt and a $35,000 Chevy Equinox, which could be more profitable rental options.
The disposal of EVs is anticipated to enhance Hertz's financial performance, with expectations of improved cash flow and earnings in the next few years. By the end of 2025, Hertz foresees better financial results driven by higher revenue per day, along with reduced depreciation and operating expenses. This strategic adjustment follows Scherr's October remarks about scaling back on EVs, which then constituted 11% of Hertz's total fleet. The company's move reflects broader industry trends and challenges in integrating EVs into traditional business models, emphasizing the need for flexibility in response to changing market dynamics.
This article was originally published on Quiver Quantitative