Hertz Emerges From Bankruptcy
Carl Icahn, a famed investor was caught with its pants down when Hertz filed for bankruptcy, he was faced with a major decision; the risk of losing it all or live to fight another day. Carl known for making quick decision turned on a dime, dumped all his shares in Hertz never minding that he is going to incur a loss of up to 1.5 billion dollars. In the midst of his sell off, Robinhood investors on the other hand were buying up the stock for pennies. Smart Money called retail investors on Reddit and robinhood dummies for buying stock in bankruptcy.
Yet, these so-called “dumb money” investors might have the last laugh. This week, shares in rival Avis Budget (NASDAQ:CAR) hit an all-time high of $90, driven by a combination of consumer pent-up-demand and vehicle scarcity. An equivalent valuation on Hertz would have priced shares at $720 million (or $4.60 per share) before its bankruptcy reorganization. With its remaining rental fleet of almost 300,000 vehicles, Hertz’s value could grow even higher.
Things won’t be smooth sailing. Bankruptcy court rulings are often unpredictable, particularly when multiple debts are involved. And another economic slowdown — whether self-inflicted or exogenous — would almost guarantee that Hertz equity holders will receive nothing.
But given the sub-$3 price of Hertz stock, it’s a one-way gamble that could be worth taking. Because if a stock has a potential 200% to 1,000% upside, investors only need a slight chance for the bet to pay off.
Hertz and the Used Car Market
Today, Hertz finds itself in a similar situation. In early March, the car rental company accepted an offer that valued the aggregate firm at $4.8 billion — a steep discount to its $20 billion pre-coronavirus valuation. By mid-April, two more bids had raised the value of Hertz’s debt alone to $6.2 billion.
Core to this rise is a simple problem of supply and demand. At the start of the pandemic, car manufacturers decreased production in anticipation of lower demand. The cuts, however, proved too steep. When sales shrank by a less-than-expected 15%, carmakers proved unable to keep up. Used car prices rose 20% for the year.
Then came the computer chip shortage. Driven by unprecedented demand for personal electronics, the world’s chip makers reduced allocation to car manufacturers. As firms from Tesla(NASDAQ:TSLA) to Peugeot (NYSE:STLA) have idled production, used car prices have risen further. The Manheim Used Vehicle Value Index is now up 52% year-on-year. Had Hertz held onto its entire fleet (assuming it had the means), they might have earned $8 billion in paper gains.
The legacy firm’s slimmed-down 300,000 vehicle fleet could become its greatest asset. As used car prices continue to rise, Hertz will find itself able to borrow more (and at lower interest rates) against each vehicle. That might not eliminate the firm’s total debts, but refinancing will lower interest payments and create a road to solvency.
What Is Hertz Worth?
Even American Airlines’ bosses didn’t know what their company was worth in bankruptcy. When you have $19 billion in debt, the difference between $18 billion and $20 billion enterprise value is negative versus positive $1 billion equity value.
Hertz shareholders have found themselves equally in the dark. In late March, Hertz’s management agreed to a plan that would repay 70 cents per dollar for unsecured creditors. Shareholders would presumably receive zero. Since then, shares in the industry have risen on investor optimism. Junior Hertz bonds now trade at 100 cents to the dollar.
That means a bankruptcy judge will now likely reject Hertz’s original proposition. If other entities are willing to buy Hertz’s debt for fuller valuations, there’s little reason to settle for a lower price that would eliminate shareholders and penalize unsecured debt holders.
Penny Stock Returns -32% on Average
Investors in over-the-counter pink sheets often face a bewildering choice of low-revenue, opaque firms. Most of these bets go on to disappoint. In fact, the average penny stock “returns” -32%. Bankrupt companies fall even further — the average stock in bankruptcy drops 70% during their proceedings, according to a study by professors at UMass and Philadelphia University. More than half of bankrupt firms go straight to zero.
Yet Hertz is a strange standout among its unlisted penny stock peers. Its global brand — which includes Hertz, Dollar and Thrifty — has 12,000 locations around the world. That makes the firm larger than 10,600-location Avis and twice as big as 6,000-location Enterprise. The industry is also riding a surge of Covid-19 reopening demand.
Rental car prices have increased 30% nationally, with some tourist destinations reporting 300% increases. Meanwhile, rental car companies have delayed replacing their fleet. Avis sold 250,000 vehicles in 2020, joining Hertz and others in shrinking available inventory. Demand for rental cars may outpace supply for years.
Hertz bondholders have wasted no time. Today, the firm’s unsecured bonds are trading at par, signaling that investors believe full repayment is forthcoming. If that’s the case, Hertz’s equity value might be worth anywhere between $800 million to $3 billion, depending on the speed of the coronavirus recovery.
That makes Hertz stock a bet worth taking. Because, strangely enough, the longer Hertz spends in bankruptcy court, the better its chance of survival. Investors take note: the Hertz saga isn’t quite finished yet.