Market Overview

Hertz & Avis: This Analyst Suggests An Auto Rental Derivatives Strategy

Hertz & Avis: This Analyst Suggests An Auto Rental Derivatives Strategy

In a report issued Thursday, MKM Partners’ Managing Director and Derivatives Strategist Jim Strugger and his team provided an idea for a derivatives play including Hertz Global Holdings, Inc. (NYSE: HTZ) and Avis Budget Group Inc. (NASDAQ: CAR).

The firm declares it remains positive on the car rental industry’s long term outlook, “even after being briefly cautious around Avis Budget's (CAR, Buy, $60.10, $80 PT) 4Q14 earnings in mid-February.”

MKM Partners recently hosted investor meetings with the managements of both Avis and Hertz (Buy, $31 price target) “and with the stocks having dipped to the low-end of their respective ranges since November,” the firm likes “revisiting long directional exposure.”

Source: MKM Partners

According to the report, Avis’ CFO David Wyshner showed himself optimistic about 2015. He said he expects the macro environment to continue to benefit the car rental industry, same as in 2014.

For its part, Hetrz’s Z CEO John Tague and CFO Tom Kennedy told the analysts and investors that the company is advancing its plans to fix financial and operational issues. “The company should become a current-filer around mid-year, an outcome that would be beneficial to the industry overall,” Strugger explained.

Source: MKM Partners

He continued, “On that front, it's notable that 3-month at-the-money implied volatility of HTZ recently declined below CAR for the first time since the company made public the need to restate prior financial results in June 2014 (top graph). The 3-month skew curve for HTZ has also come in sharply and converged toward CAR's (bottom graph).”

The Recommendation

“While CAR's 1Q15 earnings in early May could be a mixed bag, similar to 4Q15, we like long directional exposure in that term via 62.5/67.5 call spreads for $1.50 following the recent pullback. Given the likelihood that HTZ is positively correlated to CAR — with the restatement of its financials a potential positive kicker — we like HTZ June 24 strike, 33 delta calls outright for $0.90.”

Latest Ratings for HTZ

Nov 2019Initiates Coverage OnHold
Aug 2019UpgradesEqual-WeightOverweight
Mar 2019UpgradesUnderweightEqual-Weight

View More Analyst Ratings for HTZ
View the Latest Analyst Ratings

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