Recommend Shorting CAR
Initial Target Price $46.50 (>35% return)
Stock now at all-time high, $74
Valuation stretched on COVID reopening fueled short squeeze, hertz bk plan approval
Potential shenanigans related to Hertz bk plan approval
Business travel likely to remain weak in 2020
Long term secular risks threats from UBER, LYFT, and TSLA (ha!) ride sharing unlikely to disappear
Shorting Risk Management Discussion
Short Interest at 19% of the Float, high but not out of control
Prosaic business limits fantasy TAM risk to short
Current 10M ATM Share offering limits risk
1.44 P/C Ratio reasonable
GEX low at 27 bps of daily volume (9300 shares per 1% move) should allow stock to fall
Valuation Discussion
Adjusted Free Cash Flow in 2020 -$405m versus 2019 +277m 2018 +430m
Assuming Pre-COVID stock price range of $40-$50 was reasonable (although it traded much lower for the two-year
period prior), stock should be adjusted for:
-$680m in cash flow for 2020
-$400m in lower expected EBITDA for 2021 than was expected for 2021 in 2019
+ benefit from cost savings program, likely to be $200m-ish annually, +$1.3b at 6.5x EBITDA
=+220m in valuation or +$3/ per share = $43-53
Assuming CAR’s 38 year-old hedge fund manager CFO can keep costs down if activity ramps back up.
$5.2 billion market cap
$3.5 billion corporate net debt =
$8.7 billion Enterprise Value
11x 2022 Estimated EBITDA and 8.7x EBITDA guidance for when business returns to 2019 levels
Hertz & Avis used to trade around 6.5-7x EBITDA
At 6.75x EBITDA and $1 billion of EBITDA, Hertz would be a $46.50 stock
Bull Case Narratives and response
$2.5 billion in cost savings should result in rocket ship recovery
• Cost savings are driven by highly variable model and will mostly reverse when activity returns
• Company is targeting $1 billion in EBITDA at 2019 revenue levels (2019 EBITDA was $788m)
High Used Car prices lower costs in the business
• Used car prices should eventually fall as plane and train travel become common again
• Used car prices should eventually fall as new car availability improves
Other Bear Narratives
Hertz emergent from bankruptcy with less debt, may be a more effective competitor
Auto Semiconductor chip shortage may result in increased costs for Avis to grow re-fleet to meet reopening
demand.
