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Should You Avoid Hertz After Its 131% Rise?

Four months ago, I told you why to avoid Hertz stock while it goes through bankruptcy in four separate articles…

Today I answer the question – Should You Avoid Hertz After Its 131% Rise? You can read the past articles in full using the links below…

But if you don’t want to, here’s a quick recap of why you need to avoid Hertz.

Chapter 11 bankruptcy means the company will continue operating while Hertz works to restructure its large debt load.  Which as of this writing is $18.7 billion while the company only has $1 billion in cash.

The 2nd largest car rental company in the United States survived the Great Depression but it couldn’t survive the coronavirus and lockdowns.  At least in its current structure.

Why?

Because most of Hertz’s business is done via airport travelers.

Due to the coronavirus and lockdowns nationwide air traffic was down 94% in April according to the Transportation Security Administration (TSA). 

According to the Wall Street Journal this left the company’s almost 700,000 vehicles idle at airports since there are no customers to service. 

Hertz even tried selling some of its large rental fleet at auction with massive discounts to get more cash. 

But even these drastic actions didn’t work.

On May 12th during the company’s 1st quarter earnings call former Hertz CEO Kathryn Marinello said “companies aren’t built to work when revenue drops to zero.  There’s only so long that companies’ reserves will carry them.” 

Apparently, Hertz’s reserves only carried them another 10 days.

I say former CEO above, because Marinello resigned as CEO of Hertz on May 16th… Just 4 days after the 1st quarter conference call. 

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From article #2…

In any bankruptcy filing the payouts go like this…

Debt holders get paid first usually through assets sales or restructurings.

Preferred shareholders – if there are any – get paid next with whatever’s left.

And common shareholders get paid last if there’s any money left over… Usually there isn’t.

In Hertz case they aren’t likely to get paid anything either because of its massive debt load.

Why?

Because Hertz has $19 billion in debt compared to about $1 billion in cash.

To further illustrate this point…

After discounting the value of its fleet – talked about more in the original article on the company – and subtracting all remaining assets from liabilities, Hertz equity has a negative value into the billions of dollars… Meaning its worth less than zero.

So yes, while the entire company is worth more than $72 million… Its shares are worth far less due to its massive debt.

Because of its huge debt, there’s an almost 0% chance that “old” shareholders of Hertz stock – those who own now – will get paid anything after the company comes out of bankruptcy.

The people buying Hertz shares now are about to get hammered for their speculation.

And if this still doesn’t convince you, follow the “smart” money.

Since the company filed for bankruptcy, company insiders and executives sold a combined 22,303 shares as of this writing. 

And billionaire activist investor Carl Icahn sold his entire 39% stake in Hertz shares at 72 cents per share… Or for a total loss of just under $1.9 billion.

These people know Hertz is unlikely to pay anything to current shareholders after it emerges from bankruptcy or they wouldn’t sell. 

The market does crazy stuff in the short term… And this includes individual stocks.

But these crazy moves in performance in the short term don’t make you right or wrong.  Your analysis does.  And so, does performance over the long term.

And the analysis of Hertz now and going forward says to stay away…  Even though its shares rose 888% in 10 trading days.

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From Article #3

I was happy of my decision to stay away from Hertz stock even though it went up 888% in 10 days because I focus on investing for the long term.

Not gambling like this.

And it turns out that bleak wasn’t a strong enough word to end my previous article with.

How about worthless?  That may have been a better word to use.

That’s not my wording though… That’s Hertz own wording from a financial report it filed in bankruptcy court on June 12th 2020.  

Here’s the full text – again from its own filing.

Emphasis below is mine.

Moreover, the stock issuance would carry no repayment obligations, and the Debtors would not pay any interest or fees to those who provide the funding by buying shares at the market.

Hertz would include disclosure in any prospectus used to offer common stock highlighting that an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless.

Let me give you a tip when you’re reading financial filings.

If you see the word could in a financial report… Its only there to help prevent the company from being sued.

And in this case Hertz could be lying or untruthful here.

See how that works?

Because Hertz must know based on not only their recent and past poor performance, but also due to the coronavirus and limited travel still ongoing, that there’s an almost 100% certainty current shareholdings are going to be worthless soon.

This is disgusting.

***

From article #4

Apparently, someone saw our and other financial sites reporting on Hertz at the Securities and Exchange Commission (SEC)… Finally.

Because today on June 17th, 2020 the SEC put a halt to trading of Hertz shares “pending news.” 

When the SEC halts a company’s shares “pending news” that news is almost never good for the company whose shares were halted.

As of this writing the SEC hasn’t talked about this “news” yet… But according to reports the SEC now has “concerns” about the proposed stock sale by Hertz of up to $1 billion in stock.

As I said above… Finally.

For weeks, there were rumors Hertz planned to sell new stock to help it raise cash while it goes through bankruptcy.

And just a few days ago these rumors were confirmed when Hertz announced it received authorization via the bankruptcy judge in Delaware to sell up to $1 billion in new stock.

It only took me 20 minutes of work tops to figure out that Hertz shares are almost certain to be worth $0 when the company exits bankruptcy.

But it takes reporting by us and various other media outlets for the SEC to get involved?

***

After this last update on June 18th 2020 Hertz canceled the share offering… And its shares have mostly traded in the $1 range since then.

That is until October 15th when its shares skyrocketed 131% to $2.38 per share after news its reached a $1.65 billion debtor-in-possession (DIP) financing agreement.

EDITOR’S NOTE – Debtor-in-possession (DIP) financing is a special kind of financing meant for companies that are in bankruptcy.  DIP financing is used to facilitate the reorganization of a debtor-in-possession (the status of a company that has filed for bankruptcy) by allowing it to raise capital to fund its operations as its bankruptcy case runs its course. DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity, and other claims. 

The deal still must be approved by courts on October 29th before it gets this money.

But if finalized Hertz plans to use this money for “working capital and general corporate purposes.  And up to $1 billion going toward buying vehicles for its fleet in the US and Canada.”

In other words, its getting into more debt to work to get out of its old debt that caused bankruptcy.

Its not using this money to you know… Actually fix the underlying issues that got the company into bankruptcy in the first place.

Like much surrounding Hertz since March, this is a bad joke.

Continue avoiding its shares at all costs for this reason and the many ones in the previous articles.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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