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Hertz's Car Crash

08 November 2016 by lberuti

The business of car rental is not only about your ability to maintain a high utilisation rate of your fleet. It is also about selling the cars you do not want to offer to your customers, and depreciation is actually the highest cost in the industry. In a September conference, HTZ’s ( Hertz Global Holdings, Inccn ) management said that they were comfortable with the residual value estimates of their cars for the year. So yesterday night, when the company reported third quarter profit that badly trailed analysts’ estimates, blaming a decline in revenue and a drop in the values of its cars, it came as a shock to investors. The company reduced its full year earnings outlook to 51cts to 88cts, after saying a couple of months ago it expected $2.75 to $3.50. It now forecast Ebitda of $575mln to $625mln which may push leverage to more than 5 times at the end of the year, a level Moody’s said earlier could pressure HTZ’s rating. This dent into the management’s forecasting abilities led to the worst ever trading session for the stock (which was down 52% at some stage and 34% at the European close) and a brutal repricing of HTZ’s 5-year risk premium, which closed 151bps wider at 654bps. Meanwhile, the broader credit market was in wait and see mode ahead of the result of the US election tonight. Protection felt bid for choice throughout the session until the close when early forecaster reports said Clinton would be ahead in Florida, Iowa, Nevada, Ohio and Colorado triggering a late day tightening.