Dear Mr. Icahn- Thank you for Saving my Ass!



Ten days ago ATG took an entry position in Hertz Rental Cars (HTZ).  My reasoning was primarily based on the following:

  1. I’ve personally noticed a significant increase in rental car prices over the past 6 months for both business and personal travel. On a recent business trip to D.C. an SUV rental was $150/ day; when some friends visited over a weekend a few weeks later, they paid $70/ day.  I remember when you could easily get a $25/ day weekend rental and $50/ day week day rate.

After experiencing these rate hikes, I decided to do a little research on rental car companies and the industry in general.  I was shocked to learn that:

  1. Three companies (Hertz, Avis, and Enterprise) completely dominate the industry, capturing close to 90% of the entire demand and 98% of the airport market. Enterprise owns Alamo and National; Hertz has Dollar Thrifty; Avis owns Budget and Zipcar.  These various brands give the consumer the illusion of competitive pricing, but in reality the three big boys are using them to price discriminate with few competitive barriers to keep raising prices over time.

This realization led me to look at which rental car companies might offer a compelling investment opportunity.  Enterprise is private, so that left Avis and Hertz.  As of August 11, Avis had already reported 2nd quarter earnings and blew it out of the water again, sending their stock up further to a staggering 137% increase over the past 12 months.  While they may not be a bad play, ATG usually avoids chasing momentum stocks as a general rule, which left Hertz.

  1. Compared with Avis’ 137% run, Hertz stock was up 19% over the past year and conservatively valued at a 12 forward P/E ratio. They had some lingering accounting issues and a history of inferior management and results compared with Avis, but I just couldn’t see a scenario where the tailwinds of a consolidated industry and improving economy wouldn’t shoot them higher.  Established company with strong brand recognition?   Valuable product/ service in a growing industry?  Check.  Conservative valuation relative to its peers?  Check.  Count me in.

Immediately after purchasing HTZ, the stock started moving up, probably because thousands of other people like me wanted to buy it in advance of their earnings for the reasons mentioned above.  It was up 15% in a week, and I felt like genius.

On Tuesday this week Hertz announced that they were delaying their quarterly results due to continued accounting irregularities.  They also revealed that they would be drastically missing their prior earnings estimates and would be lowering their guidance once the earnings were finally released.  There goes my genius status- the stock opened down 15% the next morning.

But wait, there’s more!  Late Wednesday afternoon our knight in shining armor showed up in the form of Carl Icahn, who revealed that he had taken an 8% stake in the company with plans to “motivate management” and actively address their underperformance relative to peers.  In the blink of an eye, the stock erased almost all of its earlier day losses, ending down 3% instead of the earlier 15%.  After the bell Jim Cramer dramatically placed Hertz CEO Mark Frissora on his “wall of shame” and proclaimed that his days as CEO were numbered.

While I am thankful for being rescued from the impact of Mr. Icahn’s investment and news gossip of a management shake-up, I hate owning a stock that moves more from activist attention and news headlines than actual performance.  As a result ATG took advantage of the fortunate exit opportunity and sold its position today, managing to lock in an 11% gain in 10 days despite the negative outlook on earnings.

I could be dead wrong and see the stock continue to climb as investors bank on accelerated turn-around, but I’m betting that the stock will drop again once they finally report earnings and drop guidance.  I think it bounce if they replace the CEO, but then tank again when the new CEO lowers forward estimates to give himself a nice runway of under-promising and over-delivering for his tenure.  I’ve seen this play out multiple times, most recently with Weight Watchers.

When and if that happens, ATG will pounce on buying Hertz again.  In the meantime, we’ll let Mr. Icahn and Jim Cramer’s army of speculators have all the fun.



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