The narrative surrounding Hertz Global Holdings has undergone a dramatic transformation over the last several years. Once the poster child for pandemic era corporate distress, the rental car giant emerged from restructuring with a leaner balance sheet and an ambitious plan to lead the industry into the electric vehicle age. However, the road to modernization has proven significantly more treacherous than initial projections suggested. Today, as the company navigates the complexities of a shifting automotive landscape, a new bull case is beginning to emerge among value oriented analysts who believe the market has overly discounted the firm’s long term recovery potential.
The primary anchor on the stock in recent quarters has been the aggressive depreciation of its electric vehicle fleet. Under previous leadership, Hertz made a massive bet on battery electric vehicles, specifically through large scale procurement deals with Tesla. While the move was lauded as forward thinking at the time, the subsequent volatility in used EV prices and higher than expected repair costs forced the company to pivot. The current management team is now in the middle of a strategic sell down of these assets, opting to return to a more balanced mix of internal combustion engines and hybrids. While the financial impact of this liquidation has been painful in the short term, it represents a necessary cleaning of the house that sets the stage for more predictable earnings in the future.
Critically, the underlying demand for travel and car rentals remains robust. Despite inflationary pressures on consumers, leisure travel has shown remarkable resilience. Hertz continues to benefit from its premium brand positioning and its extensive network of airport and off airport locations. The company has also made significant strides in improving its operational efficiency. By leveraging data analytics to optimize fleet utilization and pricing, Hertz is squeezing more revenue out of every vehicle on the lot. This core operational strength is often overshadowed by the noise of one time write downs related to the EV fleet, but it remains the engine that will drive the stock if the company can achieve fleet stability.
Institutional investors are also looking closely at the competitive landscape. The rental car industry is effectively an oligopoly, with three major players controlling the vast majority of the market share. This structure provides a level of pricing power that many other consumer facing industries lack. As the industry as a whole moves away from the supply chain disruptions of the early 2020s, the focus has shifted back to disciplined capital allocation. Hertz is now prioritizing the restoration of its margins and the strengthening of its balance sheet. If the company can successfully navigate the remainder of its fleet transition through the end of the current fiscal year, the path to significant free cash flow generation becomes much clearer.
There is also the matter of market sentiment, which currently sits at a pessimistic extreme. Historically, some of the most lucrative opportunities in the transportation sector have occurred when a well known brand is out of favor due to temporary structural headwinds. For Hertz, the bear case is largely built on the rearview mirror of the EV misstep. The bull case, by contrast, looks forward to a normalized fleet environment where the company can leverage its massive scale and brand equity. As the supply of used vehicles stabilizes and interest rates potentially moderate, the cost of financing a massive rental fleet should decrease, providing another tailwind for the bottom line.
While risks certainly remain, particularly regarding the pace of used car price stabilization, the risk reward profile of Hertz is becoming increasingly difficult to ignore for those with a multi year horizon. The company is no longer the distressed entity it was in 2020; it is a global leader undergoing a difficult but necessary tactical shift. For patient investors, the current valuation may represent a floor before the market recognizes the earnings power of a stabilized, right sized Hertz fleet. The transition is far from over, but the foundations for a sustained turnaround are being laid one vehicle at a time.
