Hertz's stock gets downgraded, and Tesla has a lot to do with it

By Tomi Kilgore

J.P. Morgan's Ryan Brinkman estimates the association with Tesla is costing Hertz 'well over' $500 million

Hertz Global Holdings Inc. lost another bullish endorsement from a Wall Street analyst, and the car-rental company's association with electric-vehicle giant Tesla Inc. is a big reason behind the latest downgrade.

The downgrade comes a couple of weeks after Hertz said it was slashing the size of its EV fleet, citing weak demand and high expenses for damage.

J.P. Morgan analyst Ryan Brinkman lowered his rating on Hertz's stock (HTZ) to neutral from overweight and cut his price target by 35%, to $11 from $17.

Meanwhile, Hertz's stock rose 2.4% in afternoon trading Thursday. It has dropped 14% over the past three months, while shares of rival Avis Budget Group Inc. (CAR) have gained 2.7% and the S&P 500 index SPX has rallied 16.7%.

While Brinkman does believe the stock is inexpensive, he doesn't see many near-term catalysts that might help push the stock higher. He doesn't expect Hertz to grow earnings in 2024 or to generate positive free cash flow, which suggests there is little potential to capitalize on a lower stock price with share repurchases.

Basically, Brinkman said the company's push to incorporate EVs into its fleet in a big way, which began with its plan to buy 100,000 Tesla EVs announced in October 2021, has "fared very poorly" for Hertz.

He estimates Hertz's association with Tesla is costing "well over" $500 million. Here's why:

Tesla's decision to provide steep discounts for new-vehicle purchases to boost sales has contributed to a greater-than-expected decline in the value of used Tesla vehicles that Hertz owns. That led to higher vehicle-depreciation expenses than Hertz had anticipated.Tesla's inability, or unwillingness, to supply a sufficient amount of collision replacement parts to service and repair the EVs in Hertz's fleet has led to lower asset utilization, as EVs needing parts were temporarily removed from use, and to higher costs, as Hertz was forced to looks elsewhere to secure the needed parts.

Brinkman said that while Hertz could not have anticipated Tesla's price cuts, given that they were without precedent, the decision to buy 100,000 vehicles, making up about one-fifth of the company's fleet at that time, from a single brand exposed the company to those types of risks.

He said the "parts and service headaches" could have been anticipated given "Tesla's already widely reported problems servicing retail customers as well as its inexperience servicing commercial fleets."

Deutsche Bank's Chris Woronka also downgraded Hertz on Thursday, to hold from buy, as part of a "ratings swap" in which he upgraded rival Avis's stock to buy from hold.

Woronka believes Hertz's pivoting in its EV strategy "leaves investors with little conviction" in the company's true rate of earnings power, while he sees Avis as a "steady operator" with a relatively clear path to achieving earnings that are at least in line with current expectations.

Of the eight analysts surveyed by FactSet who cover Hertz, there's only one bull left, while the other seven are neutral on the company. There were four bulls as recently as the end of November.

-Tomi Kilgore

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01-25-24 1343ET

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