Hertz Global Holdings Inc. has received a significant blow as a Wall Street analyst downgraded the company, attributing their association with electric-vehicle giant Tesla Inc. as a major factor in the decision.
Not long ago, Hertz announced a reduction in the size of its electric vehicle (EV) fleet due to weak demand and high expenses for damages incurred. J.P. Morgan analyst Ryan Brinkman responded to these recent developments by lowering his rating on Hertz's stock to neutral from overweight and decreasing the price target by 35%, now set at $11 from $17.
While Hertz's stock saw a 2.4% rise in afternoon trading on Thursday, it has experienced a 14% decline over the past three months. In contrast, shares of Avis Budget Group Inc., their competitor, have gained 2.7%, while the S&P 500 index has rallied 16.7%.
Brinkman acknowledges that Hertz's stock is relatively inexpensive; however, he predicts limited short-term catalysts that could drive the stock price higher. Additionally, he expects Hertz to have no earnings growth in 2024 and an inability to generate positive free cash flow. As a result, there is little potential for capitalization on the lower stock price through share repurchases.
The main cause for concern lies in Hertz's ambitious effort to incorporate EVs into its fleet, emphasized by their plan to acquire 100,000 Tesla EVs announced in October 2021. Brinkman notes that this venture has proved to be highly detrimental for Hertz, estimating that their association with Tesla is costing them "well over" $500 million.
In conclusion, Hertz's partnership with Tesla has had a negative impact on their overall performance, leading to an unfavorable assessment from analysts.
Tesla's Impact on Hertz's Used Vehicle Value
Tesla's recent decision to offer substantial discounts for new-vehicle purchases in order to boost sales has had an unexpected consequence for Hertz. The value of the used Tesla vehicles owned by Hertz has declined more than anticipated as a result. This has led to higher vehicle-depreciation expenses for Hertz than initially expected.
Insufficient Supply of Collision Replacement Parts
Another issue Hertz has faced is Tesla's inability, or perhaps unwillingness, to provide an adequate supply of collision replacement parts for servicing and repairing the electric vehicles (EVs) in Hertz's fleet. This has resulted in lower asset utilization, as the EVs in need of parts had to be temporarily taken out of service. Additionally, it has led to higher costs for Hertz, as they were compelled to seek alternative sources to obtain the necessary parts.
According to Brinkman, the significant price cuts made by Tesla were unforeseen, especially since they had no precedent. However, the decision made by Hertz to purchase 100,000 vehicles from a single brand, equivalent to around one-fifth of their entire fleet at the time, exposed them to these types of risks.
Brinkman further highlights that the challenges related to parts and servicing could have been predicted. Tesla's widely reported issues with servicing retail customers, coupled with their lack of experience in servicing commercial fleets, made the "parts and service headaches" somewhat expected.
Deutsche Bank's Downgrade and Ratings Swap
As part of a "ratings swap," Deutsche Bank's Chris Woronka downgraded Hertz to a hold rating from a buy rating on Thursday. Conversely, he upgraded the stock of Hertz's competitor, Avis, to a buy rating from a hold rating.
Woronka expresses skepticism regarding Hertz's EV strategy shift, which he believes has left investors uncertain about the company's true earnings potential. On the other hand, he views Avis as a consistent operator with a clear path towards achieving earnings that align with current expectations.
Hertz Analysts: A Shift in Sentiment
In a recent analysis conducted by FactSet, it was found that the sentiment towards Hertz has undergone a significant change. Out of the eight analysts surveyed, only one remains bullish on the company, while the other seven have adopted a neutral stance. This marks a notable shift compared to the situation at the end of November when there were four analysts who expressed bullish sentiments regarding Hertz.
This alteration in sentiment highlights the evolving dynamics surrounding Hertz and emphasizes the need for a closer examination of the company's current status. The differing perspectives among analysts will undoubtedly impact market perceptions and potentially influence investment decisions. As Hertz continues to navigate through its challenges, investors are advised to consider these diverse viewpoints in order to make informed choices.