Hertz's Has A Long Road To Recovery & Margin Challenges, Goldman Sachs Downgrades Stock

Goldman Sachs analyst Lizzie Dove downgraded the shares of Hertz Global Holdings, Inc HTZ from Neutral to Sell and lowered the price target from $8 to $7.

The analyst said consensus estimates of U.S. RPD pricing of -3% and International RPD pricing of +1.5% y/y in the first quarter are too high.

This matters, as pricing has a flow through to EBITDA of as much as 90%, in the analyst's view, meaning small changes in pricing will have a material impact on future estimates.

The analyst also noted that HTZ's fleet age may pose a risk to both pricing and residual values. 

Not only do the older cars make it tougher to maintain price, but the residual value is also much lower after acquiring a higher mileage, added the analyst.

The price of used vehicles has been declining for the past 2 years, and going forward, though the analyst expects the pace of declines to moderate a little, higher interest rates are likely to continue to dampen demand due to lower affordability. 

Though the analyst expects HTZ to make meaningful headway in addressing its challenges in 2024, the turnaround may take longer than some investors expect.

Though the details around the $500 million incremental EBITDA opportunity were helpful and can go some way to offsetting some of these challenges, the analyst awaits further proof points around the realization of these savings.

With higher costs from EVs and ongoing pressures to residual values, the analyst noted HTZ is likely 3 – 4 years away from achieving potential normalized margins.

The analyst's model expects trends to get worse before they get better, with no free cash flow (FCF) generation in 2024.

Price Action: HTZ shares are trading lower by 3.68% at $7.35 on the last check Thursday.

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