Hertz Global Holdings, Inc. (HTZ) has been making headlines in the last couple of months for all the wrong reasons. Just before tragedy hit, and when shares were still trading at $3, the founder of Beat Billions warned investors to not be enticed by the falling stock price of Hertz on Seeking Alpha. You can read all that here. Hertz eventually filed for bankruptcy, and Carl Icahn dumped his holding a few days later. He was already too little too late.
On June 4, Hertz stock gained 83% to close the day at $1.50 a share – still 50% below the original price at which the warning was issued to investors. In this update, we will investigate the reasons behind this gain and determine whether investors should, indeed, be hopeful of the future of Hertz as a company and investment.
It’s All About The Reopening Of Airports
In case an investor didn’t notice, Hertz stock was not the only stock to report unusual gains yesterday. For instance, American Airlines (AAL) stock gained 47% in the same trading session. The reopening of airports in the United States, in fact, was the primary reason behind Hertz’s gains on June 4. From the look of it, this makes sense. Hertz is one of the primary beneficiaries of increased air travel activities as its vehicles have a strong presence in most of the American airports. Therefore, investors are suddenly optimistic about Hertz bringing in millions of dollars as soon as the airports return to their normalcy.
However, there’s a massive flow in this thesis, which we will explore in the following segment.
A Broken Thesis Is Driving The Stock
During the Memorial Day weekend, around 1.5 million passengers have been cleared by airport security checkpoints, which is a notable improvement from the depressed numbers reported in April. A quick look at the below chart is sufficient to confirm that airports are slowly but surely on the way to stage a recovery.
There’s no denying that these improving numbers are good news for the airline industry. However, investors should be very cautious of betting on Hertz to deliver good numbers as the airline industry is unlikely to return to the pre-coronavirus levels for at least another couple of years according to industry experts. Not to forget, Hertz is a struggling business that is on the brink of falling into an abyss, and a slight improvement in its revenue in the coming months cannot and will not save the company from its eventual fall as the likes of Uber (UBER) and Lyft (LYFT) continue to eat into the market share of Hertz.
On the other hand, social distancing policies and other preventive health measures are likely to result in increased use of personal vehicles to travel to and from the airports, which is not welcome news for Hertz and its competitors. This is something many investors are not factoring into their analysis of Hertz.
Covid-19 is not the only headwind faced by Hertz, even though the company executives and Hertz bulls have put the blame on the pandemic. A closer look at the business of Hertz reveals many faults in its operating model and the shrinking addressable market is not going to help the company recover anytime soon, if at all.
Even if Hertz reports some positive developments as a result of increased air travel, investors need to embrace themselves for more negative developments regarding the bankruptcy of the company. Hertz might be forced by creditors to liquidate some or all of its vehicle fleet, which would impair the ability of Hertz to generate revenue permanently.
In the best-case scenario, Hertz will renegotiate the terms with its creditors and come out of bankruptcy with no collateral damage. However, even in this very optimistic scenario, Hertz will still find it difficult to thwart the threat from ridesharing companies. If Hertz survives this time around, Beat Billions believes that the company will face similar conditions in the not too distant future.
We are not excited about the 80% gain of Hertz stock on June 4. Rather, we believe the optimism regarding Hertz is uncalled for and that difficult times are ahead for the company. The stock is making significant moves up and down in the market as traders gamble with the outlook for the company. A closer look at its balance sheet and industry conditions leads us to only one conclusion; Hertz stock should be avoided at any cost no matter how appealing the shares turn out to be in light of the reopening of the global economy.
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