Morgan Stanley Upgrades Hertz To Overweight

Morgan Stanley’s Adam Jonas upgraded the rating on Hertz Global Holdings Inc HTZ from Underweight to Overweight, while reiterating a price target of $13.

Jonas explained that he had maintained a cautious stance on the broader car rental segment due to near-term risks associated with the efficacy of the used car market, as well as long-term risks associated with the sustainability of the business model, especially due to technology and ridesharing options in the market.

Sentiment Change

The analyst also explained that there had been concerns that investors and management teams were not fully appreciating the gravity of these risks and their potential impact on fundamentals.

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However, Jonas pointed out that there had been a “step change erosion in investor sentiment (and consensus expectations) across multiple operational and thematic fronts,” with the consensus forecasts having declined 60 percent over the last two years.

Shift In Strategy

There has also been a “shift in management strategy to an urgent focus on cost reduction,” which the analyst sees “as a recognition of the highly competitive (even deflationary) nature of US car rental.”

Hertz Global has detailed a “bold” cost savings initiative, which is expected to bring the “unconstrained” opportunity for the company to achieve $800–$950 million in adjusted corporate EBITDA by 2018–2020.

Jonas also noted a “healthy awareness of how mobile technology and software could fundamentally transform the car rental business model and HTZ’s long term position within this model.”