hertz tim do
TRANSCRIPT
Fordham Securities This report is published for educational purposes only by Tim (Ngoc Do) – [email protected]
Date: April, 2016 Industry: Rental And Leasing
LET’S GET THE ENGINES STARTED… We issue a Hold recommendation on Hertz with a one-year target price of $13.86 using the Discounted Free Cash Flow Model. This offers a 40% increase from its closing price of $9.85 on Apr 6th, 2016. Even though HTZ offers great return, we issue a Hold because our target price is lower than concencus and the stock has high risk.
Year Revenue EBITDA1 EBIT PAT EPS2 PE 2015A 10,535 1,415 1,063 504 1.11 16.2x 2016P 10,679 1,635 1,284 460 1.05 9.4x 2017P 10,978 1,745 1,457 543 1.23 8.0x 2018P 11,274 1,866 1,591 624 1.41 7.0x 2019P 11,580 1,939 1,665 669 1.50 6.6x 2020P 11,895 2,015 1,741 715 1.60 6.2x
Major growth drivers include: • Low oil price environment fosters the Airline industry, which
directly and positively impacts Car rentals, Hertz’s main business segment
• The promising spin off of Hertz’s equipment rental business
Major risks include: • Accounting standard risk – recent delay company filings • High price pressure and lower revenue per vehicle • Evolving competitive landscape with Car-Sharing Rentals (Zipcar)
Company Overview Hertz is one of the premier brands in the rental car industry with approximately 11,555 locations in 145 countries. Hertz has been in the car-rental business since 1918 and in the equipment-rental business since 1965. Hertz Share Price Data
1 Using Corporate Adjusted EBITDA (does not include depreciation and amortization from rental fleet), and Corporate Net Debt (does not include fleet debt) 2 Recent company guidance: Corporate Adjusted EBITDA $1.6-$1.7B, EPS 0.95-1.10, and effective tax rate of 37%
Ticker: NYSE: HTZ Recommendation: Neutral Price: 9.85 (April 6, 2016) Target Price:$13.86
Time Horizon: One Year
HERTZ GLOBAL HOLDINGS (‘HERTZ’)
Market Profile
Closing Price (USD) 9.8
52-Week Range 6.9-22.6
Share Outstandings (M) 424.4
Market Cap (M) 4,000
P/E 16.0
EV/EBITDA 4.9x Source: Yahoo Finance, Thompson One, Team Estimates
Analyst Forecast Target Mean 16.4 Median 15.0 High 32.0 Low 12.0 Std. Dev 6.17 Total 7
Source: Thompson One
Analyst Comparison # of
Brokers Strong Buy 2 Buy 5 Hold 2 Underperform 0 Sell 0 Total 9
Source: Thompson One
Source: Team Estimates
Apr - 17
Target Price:
$ 13.86
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Investment Thesis Increasing revenue from low oil price Hertz generates a large portion of its businesses from airport traffic due to extensive on-airport facilities. 29% and 10% of company’s revenues come from U.S. on-airport business for leisure and commercial purposes, respectively. Before the Dollar Thrifty acquisition, Hertz had a 25% market share in the U.S. airport market, behind Enterprise and Avis Budget Group, with a 34% and 26% market share respectively. After the acquisition, Hertz became the largest car rental business with the the highest coverage at major U.S. airports and a market share at 37%3. Lower Jet Fuel price has created a positive environment for the Airlines Industry. After reaching its peak at $3.3 per gallon in 2011, Jet Fuel price has been gradually decreasing over the past few years, and currently sits at $1.1 per gallon4. Lower Jet Fuel price allows airline companies to offer more affordable air transportation to customers. The Passenger Load factor, which measures capacity utilization of U.S Airlines Company, implies a potential increase in seat fillings from roughly 81% in 2014 to 83.6% in 2017. There is a high degree of positive correlation between the revenues of Hertz’s and those of the Airlines Industry, as identified by a 0.9 correlation. Estimated growth rate of the Airlines Industry’s sales over the next three years will be around 5%, and we expect Hertz’s revenues to grow at a CAGR of 2.5% in the next 5 years. Jet Fuel cost consists 31.5% of operating costs of the Airlines Industry. Lower Jet Fuel price will result in margin expansion and create competitive price environment in the industry. Airline ticket prices have been gradually decreasing since 2015 and we expect prices to stay at the same level in 2016.
The promising spin off of Hertz’s equipment rental business (HERC) Realizing the growth potential of the equipment rental business, Hertz’s management board decided to spin off the business in order to create a stronger growth profile and a more competitive position for each business. The company also announced the intention to maintain a target net leverage ratio of 3.5x to 4.0x5. Hertz’s equipment rental business revenue has an average growth rate of 12% over the last three years. The business is also diversifying its revenue into oil and gas exploration and extraction. Recent OPEC meetings gave no decision on restricting the amount of oil production;as a result, we expect a 5% sales growth for Hertz’s equipment rental business in 2016. Using the results from our DCF model, we create a spin off model splitting the company into its car rental and equipment rental businesses. We estimate an EV/EBITDA multiple of 8.0x for the car rental business and 10.0x for the equipment rental business based on historical comparables. Using 2016 EBITDA multiple method with a net corporate debt 3.5x for car rental business and 4.0x for equipment rental business, we value Hertz’s car rental business at $13.09 per share and equipment rental business at $3.43 per share. Details of the model can be found in the appendix.
3 Data taken from Autorentalnews research and statistic 4 IndexMundi and FactSet 5 Net leverage ratio is defined as Net Corporate Debt / Corporate EBITDA. Company guidance: http://ir.hertz.com/2015-07-16-Hertz-Completes-Financial-Restatement-Provides-2015-Business-Outlook
Jet Fuel Cost
Source: IndexMundi
Airlines EPS Growth YoY
Source: FactSet, Team estimates
US Airlines Load Factor and Passenger yield
Source: FactSet, Team Estimate U.S Airport Market Share
Source: Company data, Auto Rental Industry
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Valuation We collect data from SEC filings, press release, and investment notes. Based on recent guidance on April 11th, Corporate Adjusted EBITDA is roughly $1.6-$1.7B, EPS is roughly $0.95-$1.10 with effective tax rate of 37%6; these figures are in line with our estimates. We expects U.S. car rental revenue to stay flat with US Car Rental on Airport growing at 2.5% and Hertz equipment rental growing at 5% in 2016. We value the company using a DCF model together with comparables multiple. The mean EV/EBITDA multiple for the peer group of the company was 6.8x while the median EV/EBITDA multiple was 7x. On this basis, we assign Hertz an EV/EBITDA multiple of 7x, which translates to a target share price of $13.86.
1. WACC7: Our WACC calculation of 8.6% was calculated with the following inputs. Cost of Equity: 14.9% Cost of Debt: 4.5% Risk Free Rate: 1.7% (10 year yield) Tax Rate: 37% Expected Market Return:7.00% Post Tax Cost of Debt: 2.8% Beta: 2.5 WACC: 8.6%
2. Our DCF with perpetuity growth method analysis derives a price target of $9.75. We use a growth rate of
2% to determine this price target.
6 http://ir.hertz.com/2016-04-11-Hertz-Global-Holdings-Inc-Provides-Business-Update 7 Not including fleet debt and cost of fleet debt
Discounted Cash Flow Analysis for HERTZDollars in millions, except per share
Historical Year Ending December 28, Projected Year Ending December 28,2013 2014 2015 2016 2017 2018 2019 2020
Sales $10,775.0 $11,046.0 $10,535.0 $10,679.3 $10,977.5 $11,274.0 $11,579.7 $11,895.0
EBITDA 2,216.0 1,335.0 1,415.0 1,635.0 1,744.9 1,865.5 1,939.0 2,015.4Less: Depreciation (188.0) (207.0) (196.0) (198.2) (193.2) (198.4) (203.8) (209.4)Less: Amortization (151.0) (159.0) (156.0) (153.0) (95.0) (76.0) (70.0) (65.0)EBIT 1,877.0 969.0 1,063.0 1,283.8 1,456.7 1,591.1 1,665.2 1,741.0Less: Taxes @ 40.0% (750.8) (387.6) (425.2) (513.5) (582.7) (636.4) (666.1) (696.4)Tax-effected EBIT 1,126.2 581.4 637.8 770.3 874.0 954.7 999.1 1,044.6
Plus: Depreciation 2,912.4 2,956.4 3,008.7 3,062.0 3,116.3Plus: Amortization 153.0 95.0 76.0 70.0 65.0Less: Capital expenditures (3,234.2) (3,295.0) (3,353.6) (3,413.4) (3,474.3)Less: Additions to definite life intangibles 0.0 0.0 0.0 0.0 0.0 + / - Changes in working capital (48.7) (26.6) (42.0) (23.3) (24.0) + / - Changes in other assets and liabilities 0.0 0.0 0.0 0.0 0.0
Unlevered Free Cash Flow $552.8 $603.9 $643.7 $694.4 $727.6Unlevered Free Cash Flow Growth Rate 9.2% 6.6% 7.9% 4.8%
EBITDA Multiple Method
Weighted average cost of capital: 8.6%Net present value of free cash flow (b) $2,506.0
Exit multiple 7.0xTerminal value $14,107.8Present value of the terminal value (c) 9,348.5
Enterprise Value $11,854.5 LESS: Net Debt (d) (e) (5,535.0)Equity Value $6,319.5
Diluted shares: 456.000
Equity Value Per Share (e) $13.86
Corporate Debt 6057.0Cash 522.0Minority Interest 0.0Preferred 0.0
5535.0
Net Debt
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Investment Risks Accounting standard risk: Recent accouting restatement and filling delays put a big question on Hertz’s accounting standard. In August 2015, the company withdrew its financial guidance and announced that it needed to review fiscal results from 2011 to 2013. In November of the same year, the company announced it generated $87 million less in revenues than previously thought and would restate three years’ worth of earnings8.
Price pressure risk: Hertz expects US Car Rental revenues per available car day to decline between 2.5 to 3.5 percent versus the same period last year due to pricing pressure. Large fleet size give Hertz a better advantage in scale but lower flexibility when cyclical seasonal intensify.
Car-Sharing Rentals Grow (Zipcar): Car sharing, a new model for people to rent cars more conveniently, has been expanding its footprint. Roughly 18 percent of Americans have used a car-sharing service. Substitute services including Uber and Lyft also pose a high threat to the car-rental business.
Residual risk: The percentage of “program cars” that manufacturers agreed to repurchase at a specified price or guarantee a setdepreciation rate has decreased from 48% to 30% in Hertz car rental fleet. Additionally, the decline in the value of the non-program cars causes severe residual risk for the company. Compared to Avis’s 37% program cars, Hertz faces bigger challenges.
Fuel price fluctuation: Crude oil price is down from $100 in 2014 to the present price at $40 (Apr 6th 2016), which allows Hertz to greatly reduce its fuel expense. However, major oil exporting countries are giving uncertainty signal whether they are going to further restrict oil production.
8 http://www.businessinsider.com/hertz-earnings-delayed-may-12-2015-5
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Appendix
Appendix 1: Income Statement and Free Cash Flow Buildup
Appendix 2: Spin off Model
Appendix 3: Sensitivity Analysis
Appendix 4: Deal Comps
Appendix 5: Car Rental Survey Results
Appendix 6: Other Information
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Appendix 1: Income Statement and DCF Model
Income StatementFiscal Years Ending December 31,
($ in millions) 2013 2014 2015 2016 2017 2018 2019 2020
Revenues:Worldwide car rental 8,709.00 8,907.00 8,434.00 8,487.01 8,689.73 8,886.32 9,087.51 9,293.44
Worldwide equipment rental 1,539.00 1,571.00 1,518.00 1,593.90 1,673.60 1,757.27 1,845.14 1,937.40
All other operations 527.00 568.00 583.00 598.40 614.20 630.42 647.07 664.16
Total revenues 10,775.00 11,046.00 10,535.00 10,679.31 10,977.53 11,274.01 11,579.72 11,894.99
Expenses:Direct operating 5,498.00 6,139.00 5,700.00 5,732.41 5,813.59 5,903.09 6,060.52 6,224.06
Depreciation of revenue earning equipment, net 2,533.00 3,034.00 2,762.00 2,714.22 2,763.19 2,810.26 2,858.17 2,906.92
Depreciation of PPE 188.00 207.00 196.00 198.21 193.20 198.42 203.80 209.35
Amortization 151.00 159.00 156.00 153.00 95.00 76.00 70.00 65.00
Sell ing, general and administrative 867.00 904.00 1,010.00 948.91 944.07 969.56 995.86 1,022.97 Interest expense, net 707.00 648.00 622.00 635.21 635.21 635.21 635.21 635.21 Interest income -‐ -‐ -‐ (2.00) (2.73) (3.55) (4.48) (5.52) Other (income) expense, net 102.00 (15.00) (131.00) (80.00) (80.00) (80.00) (80.00) (80.00)
Total expenses 9,707.00 10,710.00 9,963.00 9,948.75 10,073.32 10,234.58 10,465.27 10,703.64
Income before income taxes 1,068.00 336.00 572.00 730.56 904.21 1,039.43 1,114.45 1,191.35
Provision for taxes on income (533.50) (238.50) (68.00) (270.31) (361.68) (415.77) (445.78) (476.54)
Net income 534.50 97.50 504.00 460.25 542.52 623.66 668.67 714.81
Less: Net income attributable to noncontrolling interest -‐ -‐ -‐
Net income attributable to The Hertz Corporation and Subsidiaries' common stockholder 534.50 97.50 504.00 460.25 542.52 623.66 668.67 714.81
Diluted Share Outstandings 463.90 454.00 456.00 439.37 441.37 443.37 445.37 447.37
Total Share Outstandings 445.80 459.00 423.00 425.00 427.00 429.00 431.00 433.00
EPS (diluted) 1.15 0.21 1.11 1.05 1.23 1.41 1.50 1.60
Discounted Cash Flow Analysis for HERTZDollars in millions, except per share
Historical Year Ending December 28, Projected Year Ending December 28,2013 2014 2015 2016 2017 2018 2019 2020
Sales $10,775.0 $11,046.0 $10,535.0 $10,679.3 $10,977.5 $11,274.0 $11,579.7 $11,895.0
EBITDA 2,216.0 1,335.0 1,415.0 1,635.0 1,744.9 1,865.5 1,939.0 2,015.4Less: Depreciation (188.0) (207.0) (196.0) (198.2) (193.2) (198.4) (203.8) (209.4)Less: Amortization (151.0) (159.0) (156.0) (153.0) (95.0) (76.0) (70.0) (65.0)EBIT 1,877.0 969.0 1,063.0 1,283.8 1,456.7 1,591.1 1,665.2 1,741.0Less: Taxes @ 40.0% (750.8) (387.6) (425.2) (513.5) (582.7) (636.4) (666.1) (696.4)Tax-effected EBIT 1,126.2 581.4 637.8 770.3 874.0 954.7 999.1 1,044.6
Plus: Depreciation 2,912.4 2,956.4 3,008.7 3,062.0 3,116.3Plus: Amortization 153.0 95.0 76.0 70.0 65.0Less: Capital expenditures (3,234.2) (3,295.0) (3,353.6) (3,413.4) (3,474.3)Less: Additions to definite life intangibles 0.0 0.0 0.0 0.0 0.0 + / - Changes in working capital (48.7) (26.6) (42.0) (23.3) (24.0) + / - Changes in other assets and liabilities 0.0 0.0 0.0 0.0 0.0
Unlevered Free Cash Flow $552.8 $603.9 $643.7 $694.4 $727.6Unlevered Free Cash Flow Growth Rate 9.2% 6.6% 7.9% 4.8%
Perpetuity Growth Method EBITDA Multiple Method
Weighted average cost of capital: 8.6% Weighted average cost of capital: 8.6%Net present value of free cash flow (b) $2,506.0 Net present value of free cash flow (b) $2,506.0
Growth rate of FCF after 2020 2.0% Exit multiple 7.0xTerminal value $11,281.9 Terminal value $14,107.8Present value of the terminal value (c) 7,475.9 Present value of the terminal value (c) 9,348.5
Enterprise Value $9,981.9 Enterprise Value $11,854.5 LESS: Net Debt (d) (e) (5,535.0) LESS: Net Debt (d) (e) (5,535.0)Equity Value $4,446.9 Equity Value $6,319.5
Diluted shares: 456.000 Diluted shares: 456.000
Equity Value Per Share (f) $9.75 Equity Value Per Share (e) $13.86
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Appendix 2: Spin Off Model
Car Rental 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 8,718 8,907 8,434 8,487 8,690 8,886 9,088 9,293
US 6,331 6,471 6,286 6,275 6,411 6,539 6,670 6,803 International 2,387 2,436 2,148 2,212 2,279 2,347 2,418 2,490
Direct Expenses 4,938 5,412 5,010 4,907 5,018 5,125 5,234 5,346
US 3,531 3,921 3,759 International 1,407 1,491 1,251
SG&A 795 714 688 679 695 711 727 743
Depreciation, net 1,809 2,250 2,100 1,941 1,988 2,066 2,114 2,163
US 1,281 1,758 1,572 1,326 1,355 1,414 1,442 1,471
International 528 492 528 615 634 653 672 692
Non fleet 127 154 170 160 165 156 161 165 Amortization 124 130 140 125 78 62 57 53
EBITDA 1,427 815 946 1,245 1,231 1,202 1,230 1,259
Operating Income 1,176 531 636 960 988 984 1,012 1,041
Capex, net US Car Rental 1,695 1,458 1,593 1,349 1,378 1,439 1,467 1,497
Capex, net International 351 593 443 456 470 484 499 514
Capex, net non equipment earning rev 200 228 89 209 214 197 201 206
Free Cash FlowOperating Income 1,176 531 636 960 988 984 1,012 1,041
Taxes 40% 470 212 254 384 395 394 405 416
NOPAT 706 319 382 576 593 590 607 624
Plus D&A 1,809 2,250 2,100 1,941 1,988 2,066 2,114 2,163 Plus Share Based Comp 124 130 140 125 78 62 57 53 Minus Capex (2,246) (2,279) (2,125) (2,015) (2,063) (2,119) (2,167) (2,216) Free Cash Flow From Car Rental 393 420 497 627 596 599 611 625 Other Operations 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 527 568 583 630 680 734 793 857
Direct Expenses 23 23 24 26 28 30 33 35
SG&A 43 45 41 44 48 52 56 60
Depreciation, net 425 455 463 508 548 599 648 700
Dep Non fleet 8 9 10 10 10 10 10 10 Amortization 7 8 10 8 5 4 4 3
EBITDA 51 62 75 70 71 67 71 74
Operating Income 36 45 55 52 56 54 57 61
Capex, net 453 596 554 600 648 700 748 799
Capex, net non equipment earning rev 3 5 2 13 13 12 12 13
Free Cash FlowOperating Income 36 45 55 52 56 54 57 61
Taxes 40% 14 18 22 21 22 21 23 24
NOPAT 22 27 33 31 34 32 34 37
Plus Depreciation net 425 455 463 508 548 599 648 700 Plus Amortization 7 8 10 8 5 4 4 3 Minus Capex (456) (601) (556) (613) (661) (712) (760) (812) Free Cash Flow From Other Ops 5 (102) (40) (56) (64) (67) (65) (62)
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Appendix 3 : Sensitivity Analysis
Equipment Rental 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 1,539 1,571 1,518 1,594 1,674 1,757 1,845 1,937 Direct Expenses 776 854 850 893 929 966 1,015 1,065
SG&A 113 121 150 158 164 170 177 184
Depreciation, net 299 329 329 334 338 373 383 392
Dep non fleet 22 26 29 27 28 27 27 28 Amortization 21 22 25 21 13 11 10 9
EBITDA 393 315 243 259 284 286 308 333
Operating Income 351 267 189 210 243 248 271 296
Capex, net 534 433 445 451 457 498 504 510
Capex, net non equipment earning rev 19 28 69 36 37 34 34 35
Free Cash FlowOperating Income 351 267 189 210 243 248 271 296
Taxes 35% 123 93 66 74 85 87 95 104
NOPAT 228 174 123 137 158 161 176 192
Plus Depreciation 299 329 329 334 338 373 383 392 Plus Amortization 21 22 25 21 13 11 10 9 Minus Capex (553) (461) (514) (487) (494) (531) (538) (545) Free Cash Flow From Equipment Rental (5) 64 (37) 4 15 14 30 49
EBITDA 2016 1,315.00$ Exit Multiple 8.00 Enteprise Value 10,519.98$ Net Debt 4,601.35$ Equity Value 5,918.63$ Share Value 13.09$
Car Rental & Other OperationEBITDA 2016 258.58$ Exit Multiple 10.00 Enteprise Value 2,585.84$ Net Debt 1,034.34$ Equity Value 1,551.51$ Share Value 3.43$
Equipment Rental
Equity Value Per Share (Perpetuity Growth Method)
Weighted average cost of capital$9.75 7.00% 7.25% 7.50% 7.75% 8.00% 8.25% 8.50% 8.75% 9.00%1.5% $14.60 $13.41 $12.33 $11.33 $10.40 $9.55 $8.76 $8.02 $7.331.7% $15.43 $14.17 $13.01 $11.95 $10.98 $10.07 $9.24 $8.46 $7.741.9% $16.33 $14.98 $13.75 $12.62 $11.59 $10.63 $9.75 $8.94 $8.182.1% $17.31 $15.86 $14.54 $13.34 $12.24 $11.23 $10.30 $9.44 $8.642.3% $18.37 $16.80 $15.39 $14.11 $12.94 $11.86 $10.88 $9.97 $9.13
Terminal 2.5% $19.52 $17.83 $16.31 $14.93 $13.68 $12.54 $11.50 $10.54 $9.65growth 2.7% $20.77 $18.94 $17.30 $15.83 $14.49 $13.27 $12.16 $11.14 $10.20
rate 2.9% $22.16 $20.16 $18.39 $16.79 $15.36 $14.05 $12.87 $11.78 $10.793.1% $23.68 $21.50 $19.57 $17.84 $16.30 $14.90 $13.63 $12.47 $11.423.3% $25.37 $22.97 $20.86 $18.99 $17.31 $15.81 $14.45 $13.22 $12.093.5% $27.25 $24.60 $22.28 $20.24 $18.42 $16.80 $15.34 $14.01 $12.813.7% $29.35 $26.41 $23.85 $21.61 $19.63 $17.87 $16.29 $14.87 $13.593.9% $31.73 $28.44 $25.60 $23.13 $20.97 $19.05 $17.34 $15.80 $14.424.1% $34.44 $30.72 $27.55 $24.82 $22.43 $20.33 $18.48 $16.82 $15.33
Equity Value Per Share (EBITDA Exit Multiple Method)
Weighted average cost of capital$13.86 7.00% 7.25% 7.50% 7.75% 8.00% 8.25% 8.50% 8.75% 9.00%6.0x $12.51 $12.25 $12.00 $11.74 $11.49 $11.25 $11.01 $10.77 $10.536.5x $14.09 $13.81 $13.53 $13.26 $13.00 $12.73 $12.47 $12.22 $11.977.0x $15.66 $15.37 $15.07 $14.79 $14.50 $14.22 $13.94 $13.67 $13.407.5x $17.24 $16.92 $16.61 $16.31 $16.01 $15.71 $15.41 $15.12 $14.848.0x $18.81 $18.48 $18.15 $17.83 $17.51 $17.19 $16.88 $16.58 $16.27
EBITDA 8.5x $20.39 $20.04 $19.69 $19.35 $19.01 $18.68 $18.35 $18.03 $17.71exit 9.0x $21.96 $21.60 $21.23 $20.87 $20.52 $20.17 $19.82 $19.48 $19.15
multiple 9.5x $23.54 $23.15 $22.77 $22.39 $22.02 $21.65 $21.29 $20.94 $20.5810.0x $25.12 $24.71 $24.31 $23.91 $23.53 $23.14 $22.76 $22.39 $22.0210.5x $26.69 $26.27 $25.85 $25.44 $25.03 $24.63 $24.23 $23.84 $23.4611.0x $28.27 $27.82 $27.39 $26.96 $26.53 $26.11 $25.70 $25.29 $24.8911.5x $29.84 $29.38 $28.93 $28.48 $28.04 $27.60 $27.17 $26.75 $26.3312.0x $31.42 $30.94 $30.47 $30.00 $29.54 $29.09 $28.64 $28.20 $27.7612.5x $32.99 $32.50 $32.01 $31.52 $31.05 $30.57 $30.11 $29.65 $29.20
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Appendix 4: Deal Comps for Car Rental Industry
Current Price 25.00
1 Day Premium Acquirer Date Estimate Price Over(Under) Valued
58.72% United Rentals Inc 12/16/2011 45.00 80.00% 8.02% Hertz Global Holdings Inc 8/26/2012 12.88 -48.47%
59.90% Avis Budget Group Inc 6/14/2011 17.92 -28.34% 48.67% Avis Budget Group Inc 1/2/2013 88.84 255.37%
NA United Rentals 6/16/1998 19.61 -21.56% 32.15% Caterpillar Inc 11/15/2010 52.22 108.88%
0.41 39.41 57.65% Source: Factset, team estimate
Industry M&AEV/Sales EV/EBITDA EV/IBD EV/NI P/E 1 Day Premium Acquirer Date
RSC Holding Inc 3.30x 9.30x 2.10x (179.60x) (25.42x) 58.72% United Rentals Inc 12/16/2011 Dollar Thrifty Automotive Group Inc 2.40x 5.50x 2.40x 19.60x 12.87x 8.02% Hertz Global Holdings Inc 8/26/2012Avis Europe Plc 0.70x 8.80x 1.50x 43.60x 24.48x 59.90% Avis Budget Group Inc 6/14/2011Zipcar Inc 2.10x 11.90x 4.60x 39.50x 33.11x 48.67% Avis Budget Group Inc 1/2/2013US Rentals 2.60x 5.90x 3.20x 15.00x 19.43x NA United Rentals 6/16/1998Bucyrus International Inc 2.80x 16.00x 5.70x 32.00x 27.96x 32.15% Caterpillar Inc 11/15/2010Average 2.32x 9.57x 3.25x (4.98x) 15.40x 0.41
Deal Comps for Hertz
0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000
US Citizen Monthly Traveling
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Appendix 5: Car Rental Survey Results The results of our survey undoubtedly support our ‘buy’ recommendation. Consumers have certain expectations when participating in a rental transaction. They are not overwhelmingly emotional with regards to any brand, but gravitate towards what they know and trust.
Three major brands dominate the market, according to our survey, as consumers are weary of lesser popular companies. Only 13% did business with companies other than Hertz, Avis or Enterprise. In addition, Hertz has received an impressive 40% of the market share. This is promising. Purpose Hertz has affiliated its company most commonly with travel. 68% of those surveyed have rented a car from Hertz via an Airport facility. Hertz intends on growing their presence at airports, which given this statistic, will improve their business.
Of those surveyed who have used Hertz, most have done so for Leisurely purposes. They are vacationing and are in need of private transportation. This supports Hertz’s objective of obtaining business from vacationers. Coupled with their intentions of increasing their airport presence, we are very optimistic.
Hertz, 38.46%
Avis, 27.69%
Enterprise, 26.15%
Other, 13.85%
0.00%
50.00%
100.00%
Business Leisure Local Commute Other
Rental Care Purpose
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Customer Satisfaction Our survey indicated that most consumers are not loyal to a particular brand – they want a reliable and safe service that does not interrupt precious vacation time. Consumers do not react very emotionally (unless negative) in favor of a certain brand.
It is no surprise that only 12% of those surveyed consider Hertz’s service to be ‘Excellent’. It is difficult to quantify a service as excellent when it is as unexciting as renting a car. The heart of the matter lies in those who are satisfied. According to those surveyed 67% were satisfied – a notable figure when considering how unpleasant overall travel experiences can be. We are impressed by their ability to consistently deliver a familiar product to satisfied consumers.
Excellent 12%
Satisfactory 67%
Poor 4%
Other 17%
Hertz Customer Satisfaction
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Appendix 6: Other Information & Data
Balance SheetFiscal Years Ending December 31,
($ in millions) 2013 2014 2015 2016 2017 2018 2019 2020
AssetsCash and cash equivalents 411.00 490.00 486.00 763.17 1,069.97 1,417.12 1,815.55 2,247.76
Restricted cash and cash equivalents 861.00 571.00 349.00 349.00 349.00 349.00 349.00 349.00
Receivables, net of allowance of $25, $62 and $67 respectively 1,397.00 1,597.00 2,074.00 2,102.41 2,161.12 2,219.49 2,279.67 2,341.74
Inventories, at lower of cost or market 87.00 67.00 51.00 73.10 75.06 76.46 78.61 80.82
Prepaid expenses and other assets 715.00 917.00 846.00 857.59 881.54 905.35 929.89 955.21
Revenue earning equipment, at cost:
Cars and Equipment 17,991.00 18,235.00 16,967.00
Less accumulated depreciation (3,800.00) (4,582.00) (3,839.00)
Total revenue earning equipment 14,191.00 13,653.00 13,128.00 13,402.84 13,682.64 13,967.20 14,256.62 14,550.97
Property and equipment, at cost:
Land, buildings and leasehold improvements 2,249.00 2,416.00 2,422.00
Less accumulated depreciation (964.00) (1,094.00) (1,174.00)
Total property and equipment 1,285.00 1,322.00 1,248.00 1,294.93 1,353.70 1,414.06 1,476.06 1,539.75
Other intangible assets 4,827.00 4,870.00 4,804.00 4,651.00 4,556.00 4,480.00 4,410.00 4,345.00 Amortization of Inangibles (703.00) (861.00) (982.00) (982.00) (982.00) (982.00) (982.00) (982.00) Goodwill 1,352.00 1,359.00 1,354.00 1,354.00 1,354.00 1,354.00 1,354.00 1,354.00
Total assets 24,423.00 23,985.00 23,358.00 23,866.04 24,501.03 25,200.69 25,967.40 26,782.25
LIABILITIES AND EQUITYAccounts payable 1,022.00 1,008.00 875.00 880.43 904.02 920.92 946.78 973.45
Accrued liabil ities 1,171.00 1,148.00 1,106.00 1,151.40 1,182.25 1,204.35 1,238.17 1,273.05
Accrued taxes 146.00 134.00 172.00 134.53 138.13 140.72 144.67 148.74
Debt 16,309.00 15,993.00 15,907.00 15,907.00 15,907.00 15,907.00 15,907.00 15,907.00
Public l iabil ity and property damage 351.00 385.00 402.00 402.00 402.00 402.00 402.00 402.00
Deferred taxes on income 2,857.00 2,853.00 2,877.00 2,877.00 2,877.00 2,877.00 2,877.00 2,877.00
Total liabilities 21,856.00 21,521.00 21,339.00 21,352.37 21,410.41 21,451.99 21,515.62 21,581.24
Commitments and contingencies -‐ -‐ -‐ -‐ -‐ -‐ -‐
Equity:
The Hertz Corporation and Subsidiaries stockholder's equity
Common Stock, $0.01 par value, 2,000.0 mill ion shares authorized, 449.7 mill ion and 421.5 mill ion shares issued and 445.8 mill ion and 421.5 mill ion outstanding4.00 5.00 4.00 -‐ -‐ -‐ -‐ -‐ Additional paid-‐in capital 3,226.00 3,325.00 3,343.00 3,803.25 4,345.78 4,969.44 5,638.10 6,352.92 Accumulated deficit (582.00) (664.00) (391.00) (527.50) (459.25) (493.38) (476.31) (484.84) Accumulated other comprehensive loss 6.00 (115.00) (245.00) (245.00) (245.00) (245.00) (245.00) (245.00)
2,654.00 2,551.00 2,711.00 3,030.75 3,641.53 4,231.06 4,916.79 5,623.07 Treasury Stock, at cost, 3.9 mill ion shares and 0 shares (87.00) (87.00) (692.00) Total The Hertz Corporation and Subsidiaries stockholder's equity 2,567.00 2,464.00 2,019.00 2,513.67 3,090.62 3,748.70 4,451.78 5,201.02 Total liabilities and equity 24,423.00 23,985.00 23,358.00 23,866.04 24,501.03 25,200.69 25,967.40 26,782.25
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CONSOLIDATED STATEMENTS OF CASH FLOWSFiscal Years Ending December 31,
($ in millions) 2013 2014 2015 2016 2017 2018 2019 2020
Operating ActivitiesNet income 302.00 (82.00) 273.00 460.25 542.52 623.66 668.67 714.81
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of revenue earning equipment 2,452.00 2,954.00 2,690.00 2,714.22 2,763.19 2,810.26 2,858.17 2,906.92
Depreciation of PPE 188.00 207.00 196.00 198.21 193.20 198.42 203.80 209.35
Amortization 151.00 159.00 156.00 153.00 95.00 76.00 70.00 65.00
Amortization and write-‐off of deferred financing costs 56.00 57.00 60.00 -‐ -‐ -‐ -‐ -‐
Stock-‐based compensation charges 35.00 11.00 17.00 12.00 12.00 12.00 12.00 12.00
Deferred taxes on income 227.00 6.00 3.00 -‐ -‐ -‐ -‐ -‐
Other 156.00 80.00 (69.00) -‐ -‐ -‐ -‐ -‐ Income statement adjustments 3,567.00 3,392.00 3,326.00 3,537.68 3,605.91 3,720.35 3,812.64 3,908.08
Receivables (53.00) (90.00) (58.00) (28.41) (58.71) (58.37) (60.18) (62.07)
Inventories, prepaid expenses and other assets (29.00) (64.00) (22.00) (33.69) (25.91) (25.21) (26.70) (27.53)
Accounts payable 54.00 23.00 (16.00) 5.43 23.59 16.90 25.86 26.67
Accrued liabil ities 29.00 139.00 43.00 45.40 30.85 22.10 33.82 34.88
Accrued taxes 26.00 (4.00) 23.00 (37.47) 3.60 2.58 3.95 4.07
Public l iabil ity and property damage (1.00) 56.00 36.00 -‐ -‐ -‐ -‐ -‐
Cash flow from operating activities 3,593.00 3,452.00 3,332.00 3,488.95 3,579.34 3,678.34 3,789.39 3,884.10
Investing ActivitiesRestricted cash and cash equivalents (315.00) 283.00 215.00 -‐ -‐ -‐ -‐ -‐
Revenue earning equipment (10,289.00) (11,289.00) (12,658.00) (11,106.48) (11,306.85) (11,499.49) (11,695.52) (11,894.99)
Property and equipment (327.00) (374.00) (327.00) (341.74) (351.28) (360.77) (370.55) (380.64)
Other investing activities 7,081.00 8,197.00 10,005.00 8,214.03 8,363.17 8,506.65 8,652.68 8,801.32
Cash flow from investing activities (3,850.00) (3,183.00) (2,765.00) (3,234.19) (3,294.96) (3,353.61) (3,413.39) (3,474.31)
Net Cash available: (257.00) 269.00 567.00 254.75 284.38 324.73 376.00 409.79 Borrowing Needed 257.00 -‐ -‐ -‐ -‐ -‐ -‐ -‐
Financing ActivitiesIssuance/Repayment of Revolver (514.00) 683.00 (290.00) -‐ -‐ -‐ -‐ -‐
Issuance of Debt, Net 2,275.00 400.00 1,676.00 1,939.00 5,597.00 1,226.00 3,712.00 1,774.00
Repayment of Longterm Debt (1,045.00) (1,183.00) (1,293.00) (1,939.00) (5,597.00) (1,226.00) (3,712.00) (1,774.00)
Repurchase of Equity (555.00) -‐ (605.00) - - - - -
Dividends - - - - -
Options Proceeds 22.42 22.42 22.42 22.42 22.42
Others (34.00) (59.00) (28.00) Cash flow from financing activities 127.00 (159.00) (540.00) 22.42 22.42 22.42 22.42 22.42
Change in cash (130.00) 110.00 27.00 277.17 306.80 347.15 398.42 432.21
Beginning cash balance 835.00 1,112.17 1,418.97 1,766.12 2,164.55
Ending cash balance 1,112.17 1,418.97 1,766.12 2,164.55 2,596.76
Cost Current Value WeightKe 14.92% 4,180 0.39 5.84%
10 Year US Bond Yield Rfr 1.72%Expected Market Return Rm 7.00% 5.28%Calculated Beta 2.50
RM-‐RF 5.28%B(RM-‐RF) 13.2%
Kd 4.50% 6,500.00 0.61 2.74%
WACC 8.6%Tax rate 37%
CAPM
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