UPDATE: Hertz shares rally after company posts first profit in a year before turning south

11/12/17 12:57 PM EST

By Ciara Linnane, MarketWatch

Hertz has suffered several quarters of losses amid a weak pricing environment and rising fleet costs

Shares of car-rental firm company Hertz Inc. rallied about 11% early Friday before reversing their gains to trade down 1%, after the company reported its first profit in a year.

The company(HTZ)has suffered several quarters of losses in a sector pressured by weak pricing and rising fleet costs as well as competition from ride-hailing services such as Uber and Lyft. Used-car prices have plunged in recent years, dealing a blow to Hertz and rivals who rely on that market to unload thousands of cars that they retire from their fleets every year.

Hertz "likely outperformed to an even greater degree than investor expectations that were lowered following Avis' softer 3Q report earlier in the week," J.P. Morgan analysts led by Samik Chatterjee wrote in a note.

Avis Budget Group Inc. disappointed investors with a third-quarter report that missed on revenue and lower guidance than was offered in August.

"We expect that the 3Q beat will build investor confidence in Hertz's turnaround plan, which management relayed will continue into 2018," said Chatterjee.

See also:Hertz's stock is having its worst day in seven years, and it's not entirely the rent-a-car company's fault (http://www.marketwatch.com/story/hertz-stock-slammed-the-most-in-seven-years-but-its-not-all-the-companys-fault-2017-05-09)

Related:short sellers smell blood in car-rental stocks (http://www.marketwatch.com/story/short-sellers-smell-blood-in-car-rental-stocks-2017-05-09)

Hertz late Thursday reported third-quarter net income of $93 million, or $1.12 a share, compared with $44 million, or 52 cents a share, in the year-ago period. Adjusted earnings were $1.42 a share. Revenue rose to $2.57 billion from $2.54 billion in the year-ago period. Analysts surveyed by FactSet had estimated adjusted earnings of $1.35 a share on revenue of $2.57 billion.

Read:Morgan Stanley keeps Goodyear its top pick in cars, shared mobility (http://www.marketwatch.com/story/morgan-stanley-keeps-goodyear-its-top-pick-in-cars-shared-mobility-2017-11-07)

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MKM analyst Christopher Agnew said the numbers confirm a turn in Hertz' fundamentals, after years of falling prices and rising fleet costs.

"We see 3Q results as confirmation that negative pricing and fleet cost trends bottomed and that earnings momentum is turning," Agnew wrote in a note. "The company recently announced it successfully refinanced and amended important parts of its balance sheet and we believe this should provide further evidence that the company has turned a corner."

CreditSights analysts, weighing in on the balance sheet and other items of interest to bondholders, said the lack of guidance on the earnings conference call was a "confidence buzzkill."

Read now: Tesla's junk bonds are trading under water -- and it could spell trouble for Elon Musk (http://www.marketwatch.com/story/teslas-junk-bonds-are-trading-under-water-and-it-could-spell-trouble-for-elon-musk-2017-11-10)

"The good news for investors is that the discussion was more focused on the pace of favorable actions to improve fleet planning, upgrade technology, control unit costs, and offer some mild optimism on the timing to recover rising fleet costs," they wrote in commentary.

While some of the fleet cost improvement in the quarter came from demand for replacement cars after hurricanes Harvey, Irma and Maria, Hertz also took steps to mitigate back end risk through vehicle mix selection.

"The residuals will remain subject to the market seeing record demand to absorb that record supply," they wrote. "For bondholders, a natural disaster supporting used car values was certainly better than the guidance disaster of last year's third quarter," that led to a change of CEO, a downward spiral by the company's bonds and a spike in spread volatility.

Hertz's most active bonds, the 7.625% note that mature in June of 2022, were last trading at 102.81 cent on the dollar to yield 6.720%, or 267 basis points higher than where they were trading before the earnings, according to trading platform MarketAxess. On a spread basis, the notes were 471 basis points over comparable Treasurys.

Shares are down 7% in 2017, while the S&P 500has gained 15%.

-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com

 

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11-12-17 1257ET

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