Hertz's (HTZ) Stock Down Despite Q2 Earnings & Sales Beat

Hertz Global Holdings Inc. HTZ came out with better-than-expected results for second-quarter 2016, which also marked the company’s first earnings release following the spin-off of its equipment rental business. However, shares dropped 1.7% in the after-hours trading session as both sales and earnings declined year over year.

Quarterly adjusted earnings from continuing operations plunged 48.8% year over year to 41 cents a share. However, the figure substantially beat the Zacks Consensus Estimate of 30 cents. On a reported basis, Hertz Global posted loss per share of 33 cents, against earnings of 14 cents reported in the prior-year quarter.

Total revenue slipped 2.3% year over year to $2,270 million due to soft revenues at the U.S. and International rental car segments, coupled with unfavorable currency movements. Nonetheless, the top line fared better than the Zacks Consensus Estimate of $2,265.5 million.

Corporate earnings before interest, taxes, depreciation and amortization (EBITDA), on an adjusted basis, slumped 25.2% to $184 million, with the margin contracting 250 basis points (bps) to 8.1%. Management revealed that earnings and EBITDA were adversely impacted by unexpected insurance related charges at the International Rental Car segment.

Key Q2 Developments

During the second quarter, Hertz successfully closed the separation of its equipment rental business for cash receipts of nearly $2.0 billion. Also, the company converted its U.S. Firefly operations to its Thrift brand, as it forms part of the plan to focus on its Hertz, Dollar and Thrifty brands. Apart from this, Hertz invested in Luxe during the quarter, alongside signing one-year contracts with Uber and Lyft.

Further, the company is progressing well with its three-to-five year margin enhancement plan, which was announced in Nov 2015. Being in the first year of the plan, Hertz generated cost savings of roughly $100 million in the reported quarter, and is well on track to achieve its target of $350 million for 2016.

Segment Performance

Hertz now reports under U.S. Rental Car ("U.S. RAC"), International Rental Car ("International RAC") and All Other Operations segments.

Revenues for the U.S. RAC segment fell 2% year over year to $1,584 million in the second quarter due to an 8% fall in pricing or Total Revenue per Transaction Day (“RPD”), offset by a 6% rise in transaction days.

Quarterly revenues for the International RAC segment came in at $540 million, reflecting a year-over-year decline of about 3%, including negative foreign currency impact. Excluding currency impact, revenues fell 2%, attributable to a 2% drop in constant-currency Total RPD. Transaction days remained flat during the quarter. International revenues were also hurt by lower-than-expected European demand, owing to security issues stemming from the recent Paris attacks.

Despite softness across the oil and gas sector, revenues remained flat in the All Other Operations segment, at $146 million. This segment mainly houses Hertz’s Donlen leasing operations.

Financial Update

The company ended the second quarter with cash and cash equivalents of $1,285 million, total debt of $15,392 million, and shareholders’ equity of $1,609 million.

Outlook

Management remains pleased with the improved pricing trends in the U.S., which also continued into the third quarter. Considering this and the separation of its equipment rental business, management provided a fresh view for full-year 2016, for the stand-alone Hertz Global company.

Adjusted corporate EBITDA for Hertz Global is expected in the range of $850–$950 million.

The company anticipates domestic RAC revenue growth in a range of flat to down 1.5%. Further, U.S. RAC net depreciation per unit per month is projected in the band of $290–$300 million, with U.S. RAC capacity growth between -3% and -2%. Net non-vehicle capital expenditure for 2016 is expected in the range of $125–$150 million.

The company expects non-vehicle cash interest expense of $280–$290 million in 2016 and free cash flow in the range of $500–$600 million.

Finally, Hertz expects adjusted earnings per share in the range of $2.75 to $3.50. Earnings guidance for the full year is based on expected shares outstanding of 85 million and an effective tax rate of 37%.

Zacks Rank

Hertz currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Dynagas LNG Partners LP (NYSE:DLNG) and Green Plains Partners LP (NASDAQ:GPP) , each carrying a Zacks Rank #2 (Buy). Another well-ranked stock in the related industry is SPS Commerce, Inc. (NASDAQ:SPSC) , with a Zacks Rank #2 as well.

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