2 Catalysts Could Mean 35% Upside For This Market Leader

Consumers thrive on convenience. This has extended to all parts of our lives — especially the car rental business.

#-ad_banner-#Sometimes, the ability to rent a car with a quick swipe of the credit card and without having to interact with other humans is a big positive. There is proof that the model works, with Zipcar having paved the way.

But it’s not only the convenience that makes this business model appealing. The pricing is better for consumers because there’s less overhead.

Hertz Global Holdings (NYSE: HTZ) is the latest company to get into the business of making car renting easier. Hertz recently launched an off-airport on-demand rental service that allows customers to rent vehicles anytime without any customer agents, bringing self-service to more car rental customers.

Hertz should be able to capture more market share as it continues to add more locations with this feature, including in conjunction with its newly acquired Dollar Thrifty brand, and as more customers opt for its convenience.

Hertz already owns a quarter of the world’s car rental market by market share. The industry has gotten much smaller over the past few years with the help of consolidation, including Hertz’s acquisition of Dollar Thrifty last year. Hertz also has a hand in the equipment rental business, owning about 5% of the global market.

  Hertz owns just under 15% of the U.S. off-airport market, but it’s looking to partner with insurance companies to get a part of the large insurance replacement market.  

Although 2014 will likely be another transition year for the company as it continues to integrate its Dollar Thrifty acquisition, this should be a positive year for Hertz nonetheless. Once the integration is complete, Hertz expects further fleet reductions, meaning there are opportunities for utilization growth.

The other positive for this year is most of the major car rental companies will be hitting the auctions to offload excess capacity. Bringing the supply of rental cars more in line with demand should lead to better pricing for rental car companies.

Most people think of the airport when they think of car rentals, but Hertz is looking to change this mindset. Hertz owns just under 15% of the U.S. off-airport market, but it’s looking to partner with insurance companies to get a part of the large insurance replacement market. Hertz also increased its off-airport market with the Dollar Thirty acquisition.

This market is attractive, as it tends to have long rental periods and is less cyclical. To win this market, Hertz will be looking to build locations next to insurance agencies, auto shops or hotels.  
There’s speculation that a number of major hedge funds are circling the stock, namely for the prospect of pressuring Hertz to spin off its equipment business. Hertz Equipment Rental, which makes up just under 15% of the company’s total revenue, is much more cyclical than Hertz’s car rental business. A spin-off of its equipment rental business would free Hertz to focus on its core car rental business.

Dan Loeb’s Third Point Capital and Keith Meister’s Corvex Capital both own Hertz. At the end of last year, Hertz adopted a poison pill to prevent an activist from taking control of the company. Wellington Management is the company’s largest shareholder with a 9.2%. Even with the poison pill in place, and even if the equipment rental unit isn’t spun off, Hertz looks to be a great long-term buy.

Risks to Consider: The key risk to Hertz is a reductions in airline travel. The recent severe weather may well have an impact on the company’s performance, which could result in lower profitability for the quarter. Hertz also carries a relatively high debt load compared with its peers. This means lower cash flow for replacing its fleet and higher financing costs.

Action to take –> Buy Hertz with upside to $35. The company hit its 52-week high earlier this year, but it’s down 10% year to date after being pulled down along with the broader market. A price to earnings multiple of 21, which is in line with the industry average, on 2013 earnings per share of $1.70 suggests 35% upside.

P.S. Amy Calistri, the Chief Investment Strategist behind StreetAuthority’s premium Stock of the Month advisory, has long been a fan of Hertz. This is the same analyst who’s produced annual returns of up to 510% and has picked winning investments roughly 85% of the time. To learn how she’s generating those returns for her thousands of subscribers right now, click here.