Carl Icahn had another activist victory earlier this week with EBAY’s announcement of a PayPal spin-off. However, Hertz, a name in which Mr. Icahn has recently increased his stake, has sold off aggressively this week in contrast.
Hertz is a hedge fund hotel, with the following top holders:
Besides Icahn, Glenview, SRS, Fir Tree, and York are all top ten holders, and they are all hedge funds familiar with special situations such as Hertz.
Carl Icahn is not the only activist investor among that group. Fir Tree has recently pushed for the ouster of the CEO, as detailed by the WSJ:
Meanwhile, Fir Tree Partners, a New York City hedge fund that owns about 3% of Hertz’s shares outstanding, issued a statement on Wednesday calling for the removal of Hertz’s chief executive.
“The CEO has had some serious missteps, and it’s time for a change,” Scott Tagliarino, a spokesman for Fir Tree Partners, said. “We believe Hertz has an incredible brand and an opportunity to show leadership in the car rental industry.”
“We look to work constructively with management and the board to address these issues,” Mr. Tagliarino added.
In a statement, Hertz said it welcomes “a constructive dialogue” with all shareholders.
“We have a good handle on the nature and scope of the issues in the business and are executing plans to resolve them,” the company said, again pointing to recent hires in the accounting and finance departments and to a series of “new procedures and controls” that have been since put in place. No details have been released on those procedures and controls.
In the midst of the activist badgering, Hertz stock has sold off to its lowest level of 2014 this week. The two main catalysts for the aggressive selling were Ford’s reduced profit forecast and Avis Car Rental’s negative comments about the industry on Wednesday (noting a weak international market and a weakening used car market in the past few months). That comes after Hertz itself warned investors in late August that it would not be able to meet prior profit guidance.
On the weekly chart, we can see that Hertz is now trading back below the $27.50 level that was essentially the breakout to a new all-time high:
All of the recent buyers, including Mr. Icahn, are now under water on their investment.
Goldman Sachs research discussed the disappointing management commentary from Hertz in late August:
Hertz’s 2Q update was disappointing and marks the fourth consecutive quarter of underperformance versus Avis in the RAC segment and URI in the HERC segment. In RAC, total domestic revenue growth of 4.0% was below our 5.5% forecast but pricing of up slightly was better than our -0.50bp forecast. Internationally, revenue growth of 7.0% was above our 6.1% forecast. In HERC, revenue growth of 1.0% was below our 8.6% forecast. While the company highlighted some exogenous events that impacted, we continue to struggle with why Hertz should underperform Avis, particularly at the airport given they are largely at the same locations, have the same cars, and have a similar customer. On the accounting issue, HTZ indicated it is still conducting a review of its records for 2011-2013. It also withdrew its previously provided FY outlook and indicated that it will be “well below” the low end of its previous guidance.
While activist investors are focused on the spin off of the equipment rental unit and an improved management team, at the end of the day, Hertz is still a rental car company. Here is a breakdown of its revenues by segment from the most recent 10-K:
In this context, the negative outlooks from both Ford and Avis have to be concerning from a long-term business standpoint for Hertz shareholders. The sum-of-the-parts argument looks less and less and attractive if the biggest part of that sum (the U.S. rental car business) is rapidly losing value (see the CAR stock chart for reference).
Given the heavy activist involvement, headline risk, and recent volatility, it’s not a surprise to see HTZ implied volatility in the mid-40’s:
With high options pricing and the oversold nature of the stock, the one trade that looked interesting to me was an in-the-money call butterfly in Dec expiration, nearly year end. The Dec 20/25/30 call butterfly costs about $2.20, which would offer break-evens of $22.20 and $27.80. On the downside, the activist involvement and decent valuation on a sum-of-the-parts basis could support the stock, while the overall poor business climate for rentals could keep a lid on the upside over the next few months. But we’d like to have a better payout for the risk so we’ll keep looking
This is a special situation with wide options bid/ask, so we are going to do some more work and might pull the trigger on a new trade when we feel more comfortable with the entire situation.