Hertz Penalized for Accounting Mishap, Stock Down 9.1% - Analyst Blog

Shares of car rental giant, Hertz Global Holdings Inc. HTZ rolled down 9.1% on Friday due to accounting mishaps that led the company to postpone its first quarter fiscal 2014 earnings announcement and related 10-Q filing. The earnings release scheduled for June 9 were delayed due to the identification of certain errors in its financial results for 2011 and the need to restate the same as well as make relevant corrections in its 2012 and 2013 statements.

Hertz, on Friday morning, approached investors stating that its audit committee has declared that the company's financial statements for 2011 are no longer reliable and must be restated. The errors in the statements relate to the capitalization and timing of depreciation for certain non-fleet assets, allowances for doubtful accounts in Brazil, allowances for uncollectible amounts regarding renter obligations for damaged vehicles and restoration obligations at the end of facility leases.

As a result, the audit committee has directed to initiate a complete review of the company's financial results for fiscal years 2011, 2012 and 2013.

Additionally, the company's independent registered public accounting firm PricewaterhouseCoopers LLP has identified that at least one material flaw remained in the company's internal controls over financial reporting that led to disclosure controls and procedures that were “ineffective” at the end of 2013. As a result, the company expects to receive an adverse opinion from PricewaterhouseCoopers.

Although grappling with the accounting issues, the company has provided a bird's-eye view of the upcoming results, projecting below consensus results for the first quarter due to the costs associated with the accounting review and other items. The company stated that the U.S. rental car revenue was up about 4.5% in the quarter and total revenue per day was down 1.6% from the year-ago comparable quarter.

Further, the company highlighted that April revenues benefitted from U.S. car rental which is experiencing constructive pricing for its airport brands in the U.S. on account of tighter supply, favorable holiday shift and anniversary of the U.S. Government sequester. However, the company projects pricing in the second-quarter to be impacted by mix as volume growth in the off-airport segment continue to grow at a double-digit rate, airport volumes enter a lean period ahead of the third-quarter peak, and the discount Firefly brand captures incremental business.

On the international front, car rental revenues rose 1.7% in the first quarter and the company anticipates further growth in the second quarter based on improvement in the European and Asia Pacific economies. Looking ahead, volume gains are expected to stem from new Thrifty and Firefly locations ramp-up and economic recovery benefits for Hertz Classic. Also, Hertz's fleet costs are projected to get better and international franchising continues to gain traction. Further, the company expects greater penetration through the expansion of its Dollar, Thrifty and Firefly brands.

Additionally, Hertz stated that its worldwide equipment rental revenue rose 2.4%, while revenue for the other segment grew 7.3%.

Currently, Hertz carries a Zacks Rank #3 (Hold). Better-ranked stocks in the business services industry include Avis Budget Group Inc. CAR, ExamWorks Group Inc. EXAM and Viad Corp VVI, all of which sport a Zacks Rank #2 (Buy).

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