Hertz Investors Brace for More Rental-Car Tumult From Muted CEO

(Bloomberg) -

If Kathryn Marinello is still learning on the job as chief executive of troubled Hertz Global Holdings, shareholders may be hoping Investor Relations 101 is next on the syllabus.

Hertz left investors baffled last month when the auto-rental company suddenly canceled plans to refinance some of its debt with little explanation. Its stock and bonds plummeted the next trading day as investors assumed Marinello’s decision to conserve cash instead of redeem bonds signaled the worst for second-quarter results.

They’re about to find out if those assumptions were correct. A day after rival Avis Budget Group Inc. slashed its annual profit forecast, Hertz reports second-quarter results late Tuesday. With analysts projecting a third straight quarter of adjusted losses, Hertz investors who’ve been left in the dark are bracing for more bad news about the state of rental-car companies’ business model and want clarity on the state of Marinello’s turnaround bid.

“It’s very important for Hertz to be clear on the outlook and have something reasonable to say,” said Joel Levington, a credit analyst with Bloomberg Intelligence, which is owned by the same parent company as Bloomberg News. “If they don’t start providing context on where the business is and what steps they are taking to address the problems, investors won’t let them get away with it.”

Repairing Hertz has been a challenge for Marinello, 61, who inherited the CEO job in January from John Tague. Tague served in the role for less than three years and had taken over from Mark Frissora, who loaded up on discounted cars and cut prices to gain market share. Hertz spokeswoman Karen Drake declined to comment.

Rental-car companies are under pressure from the emergence of ride-hailing and sharing companies Uber and Lyft. At the same time, falling used-vehicle prices have added to their costs as the value of the autos on their lots have rapidly depreciated.

While budding partnerships between rental firms and big tech companies breathed some life into Hertz and Avis’s shares, the companies are still struggling under the weight of bloated car fleets.

Avis on Monday projected full-year adjusted earnings per share in the range of $2.40 to $2.85, down from a previous forecast of as much as $3.50. The negative outlook sent the shares of both Avis and Hertz tumbling after the close of regular trading Monday.

Both companies have had to lower the rates they charge customers to rent vehicles, with Avis’s dropping about 4 percent in the quarter ended in June, according to Chief Executive Officer Larry De Shon. Analysts at Barclays had predicted pricing declines of just 1.5 percent for Avis and 1.75 percent for Hertz.

Marinello has laid out an ambitious fix-it plan: Sell off Hertz’s bloated fleet of compact cars and family sedans and purchase more of the sport utility vehicles drawing greater demand. Her strategy hinges on SUVs getting better rental rates while in service and recouping more when Hertz sells them later on.

It could eventually work, but selling those unloved passenger cars in the meantime is tough medicine for the company whose largest shareholder is billionaire Carl Icahn. Hertz’s depreciation costs were up 15 percent per vehicle per month in the first quarter, to $348. That’s the fastest decline in car values in a quarter since 2010 and mirrors the annual depreciation rate from 2008, during the financial crisis, according to Barclays.

The expensive strategy contributed to Estero, Florida-based Hertz, reporting an adjusted loss of $1.61 per share in the first quarter, almost double what Wall Street had been expecting. The lack of guidance from the company that the big loss was coming helped spur about a 30 percent drop for the company’s shares that week in May.

On Marinello’s first earnings conference call, Northcoast Research analyst John Healy asked whether Marinello was trying to recoup market share by keeping a big fleet, or was trying to reduce the number of cars so Hertz wouldn’t have to lower rates to attract customers. The question hit a nerve.

“I find it interesting that you’re questioning that, but most of the analysts are accusing us of damaging the industry because we’re over-fleeting,” she said on the call. “So, it’d be great if somebody could be consistent on what they want us to do and what they think would work.”

For the second quarter, analysts are expecting an adjusted loss of 24 cents a share. Hertz’s stock was down 29 percent this year through Monday’s close, while Avis’s had dropped 9 percent.

When Hertz announces earnings, investors will want to know why the debt redemption was canceled and if it signals deeper problems at the company, said Barclays analyst Dan Levy, who has the equivalent of a sell rating on the shares.

“There’s not much communication with the street,” Levy said in a phone interview. “We’ve had five years of negative surprises and this just raises a lot of questions.”