10-K Tuesdays: Hertz Global Holdings

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I’m going to try to start doing a weekly post digging into the 10-K of a stock that has been active on Stocktwits over the past week.  I’ll plan on choosing one stock from the social signals list, and will generally try to stay away from companies with less than 500m market cap.

Hertz Global Holdings (10-K filed on 3/4/13)

Fundamentals:

Market Data:

Current Price: $23.73
Market Cap: $10.65 B
Enterprise Value: $25.5 B

Income Statement:

2012 Revenue: $9.02 B
2012 EBIT: $1.1 B
2012 EBITDA: $3.6 B
Operating Margin: 12.2%
EBITDA Margin: 39.9%

Balance Sheet:

Book Value of Assets: $23.2B
Unrestricted Cash: $533
Intangible Assets: $5.4B
Book Value of Debt: $15.4B
Book Value of Equity: $2.5B

10-K Notes and Quotes:

About the Company:

Car Rental:

Global locations:  “10,270 corporate, licensee and franchisee locations in North America, Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand”

Hertz: 8,860 locations; Dollar and Thrifty: 1,410 locations

“We also own Donlen Corporation…which is a leader in providing fleet leasing and management services.”

Equipment Rental:

“340 branches in the United States, Canada, France, Spain, China and Saudi Arabia, as well as through our international licensees.”

Segment/Regional Breakdown:

Hertz Rev By Segment

Company History:

Bought by Ford in 1987, then private equity in 2005, PEs own 26% of outstanding as of Dec 2012.

Hertz acquired Dollar Thrifty in Nov 2012

Car Rental Division: 

worldwide car rental segment: $7.6 B in revenues in 2012. 85% of company revs.  $1.0 B in adjusted operating income (82% of adjusted operating income)

Hertz is premium brand, Dollar Thrifty are value brands.

Market Opportunity:

$37 billion global car rental industry; $24 B US, $13 B Europe.

Segmented by type of customer and airport/off airport:

HTZ Car rental Table

Hertz has to obtain concessions to operate at airports: “obtained from the airports’ operators…typically governmental bodies or authorities.” Require to pay percentage of revs and fixed rent.

Off airport smaller boxes, lower transaction volume.

Hertz may charge on a “hourly (in select markets), daily, weekend, weekly, monthly or multi‑month basis, with rental charges computed on a limited or unlimited mileage rate, or on a time rate plus a mileage charge… In addition to car rentals and licensee fees, we generate revenues from reimbursements by customers of airport concession fees and vehicle licensing costs, fueling charges, and charges for ancillary customer products and services”

32% of bookings from travel agents, 30% from websites, other includes by phone, third party websites and local booking sources/tour reservations.

Loyalty members represent 37% of transactions.

Also have Hertz licensees in 140 countries which pay a % of revenue, and franchises of Dollar and Thrifty.

About the Fleet

Hertz is one of the largest private sector purchasers of new cars in the world.

Operated a peak of 490,700 cars in the US and 177,900 cars internationally in 2012.  668,600 total.

Hertz holds cars for 18 months on average in the US and 14 months internationally.

“manufacturers agree to repurchase cars at a specified price or guarantee the depreciation rate on the cars during established repurchase or auction periods”  In 2012 30% of car purchases are made under repurchase programs, fell from 48% in 2011.  Decrease driven by Dollar-Thrifty acquisition. Non-Program cars are cheaper to acquire, but opportunity for ancillary revenue when disposed. 178,300 non-program cars were disposed of in 2012.

25% of US fleet is GM, 16% Ford, 16% Nissan, 13% Toyota

26% of international fleet is Ford, 21% GM, 12% Toyota, 2% Nissan

Non program cars sold 33% auction, 47% through dealers and 13% “Rent2Buy”

Competitors: Avis Budget Group, Enterprise, National, Alamo.  Hertz is largest in US.  International competitors: ABG, Europcar, which operates national and alamo brands.  Enterprise also has Euro presence and local competitor Sixt in Germany.

Car Rental Operating Notes:

Hertz Car Rental completed 29m transactions worldwide in 2012. 148.8m transaction days => 5.1 days/transaction. $40.01 average rental rate per transaction day. 665,000 average fleet size. $1 B adjusted operating income on $10.7 B fleet book value (~$16,105 per vehicle). Capex on revenue earning equipment was $8.9 B.

Equipment Rental Division:

$1,385.4 million in revenues (15% of revs. 18% of adjusted operating income)

Market Opportunity

Equipment rental industry: $31 B annual opportunity, but fragmented, and HERC only addresses a segment.

“HERC rents a broad range of earthmoving equipment, material handling equipment, aerial and electrical equipment, air compressors, generators, pumps, small tools, compaction equipment and construction‑related trucks. HERC also derives revenues from the sale of new equipment and consumables as well as through its Hertz Entertainment Services division, which rents lighting and related aerial products used primarily in the U.S. entertainment industry.”

“The equipment rental industry serves a broad range of customers from small local contractors to large industrial national accounts and encompasses a wide range of rental equipment from small tools to heavy earthmoving equipment”

Long term trend toward renting construction equipment: 50% of all equipment sold into the U.S. construction industry is to rental companies, compared to 5% in 1993.  As much as 50% of the equipment used in the construction industry could be rental equipment by 2015.

“HERC’s customers consist predominantly of commercial accounts and represent a wide variety of industries, such as construction, petrochemical, automobile manufacturing, railroad, power generation, shipbuilding and entertainment and special events.”

No customer >1.5% of revenues. 37% of revenue from construction, 27% from industrial, rest is government/other.

The per-unit acquisition cost of units of rental equipment in HERC’s fleet varies from over $200,000 to under $100. The average per-unit acquisition cost was $38,000.

“the average age of HERC’s worldwide rental fleet was 43 months.”

“In the United States and Canada, the other top national‑scale industry participants are United Rentals, Inc., or “URI,” Sunbelt Rentals, Home Depot Rentals and Aggreko North America. A number of individual Caterpillar, Inc., or “CAT,” dealers also participate in the equipment rental market in the United States, Canada, France and Spain.”

Equipment Operating Notes:

Capex on revenue earning equipment was $762 m.

Notable Risks:

Insurance implications and third party liability associated with renting equipment. Business is highly seasonal. Like kind exchange taxation means that if fleet shrinks, company has significant tax liability. Manufacturer recalls. Reliance on asset based borrowing.

Management:

CEO: 6 years with company, previously CEO of Tenneco (7yrs). Also worked at Aeroquip Vickers, GE and Philips. Director at Walgreen and Delphi.

Heads of US and international vehicle rental each been at company for nearly 30 years.  Rest of senior management max six years.

MD&A Notes

“Depreciation rates are reviewed on a quarterly basis based on management’s ongoing assessment of present and estimated future market conditions, their effect on residual values at the time of disposal and the estimated holding periods.”

$9.6 B in capex, $7.1 B in disposal proceeds. “net” capex: $2.5 B. Cash flow from ops is $2.7 B => FCF after “net” capex: ~$200 m.

Debt Profile

$15.5 B in debt outstanding. $6.2 B due 2013, $3.5 B due 2014-2017. $5.8 B due thereafter.

$6.5 B corporate debt. Largest bucket is $3.7 B in senior notes, 6 3/4 average interest rate due between 2018-2022. $8.9 B in asset backed debt. Company has 20 different types of debt outstanding.

In addition to debt, company has $2.4 B in operating lease and concession agreements and $5.8 B in purchase obligations.

Debt/EBITDA: 4.3x. EBIT/Interest Expense: 1.7x

Back of the envelope math:

$25.5 B Enterprise Value = 2.82x sales, 23.2x EBIT, 7x EBITDA, >100x FCF net of “net” capex.

If you assume 85% of EV is car rental business (equal to revenue share) means enterprise value of the car business is $21.67 B.  Global fleet of 665k cars implies $33 k Enterprise value per vehicle in fleet vs. 13k book value

665k cars rented 365 days per year yield 242.7 m potential transaction days.  148.8 m transaction days in 2013 implies 61% fleet utilization.  Stated otherwise, each vehicle was rented about 223 days per year.  100% utilization at $40 in rental revenue per transaction day would get to $9.7 B in rental revenue vs. $5.9 B in 2012.

$7.6 B in car rental revenue in $37 B market opportunity implies 20% market share vs four named competitors.  If fleet market share is also 20%, then the global rental fleet would be about 3.3m vehicles.

$24 B US market opportunity at $51 total revenue per transaction day implies 470m transaction days up for grabs.  At 5 days per transaction, implies 94m transactions made in the US per year, which is about 3.3 per capita.

12.2% operating margin on $51 in rental revenue per transaction day implies $6.22 in operating income per transaction day.  $9.05 B market cap (85% of $10.65B total market cap) needs 1.455B transaction days or 291 m transactions to break even on an operating basis, un-discounted for time value.  Hertz car rental completed 29m transactions in 2012.

Couldn’t find clear disclosures on disposal economics, which are key to business–but disposal proceeds are 74% of purchase capex.

If it holds a car for 18 months, $51 total rev/day, 61% utilization yields 333 transaction days, 17032 in revenue, at 40% EBITDA margin is $6813 per car. If car depreciates by 25% in first 18 months, $27,252 original purchase price is break-even. 10% ROIC (ex-time value) at $19,500 purchase price per car.