Hertz Falls as Review Prompts Withdrawal of 2014 Forecast

Aug 20, 2014 11:41 am ET

(Updates with analyst downgrades in seventh paragraph.)

Aug. 20 (Bloomberg) -- Hertz Global Holdings Inc. fell the most in more than nine months after saying 2014 results will be “well below” its forecast, citing accounting-review costs and industrywide vehicle recalls that prevented it meeting demand.

The stock tumbled 10 percent to $28.25 at 11:38 a.m. in New York after Hertz withdrew its outlook yesterday evening. Earlier the Naples, Florida-based company’s shares fell as much as 13 percent for the biggest intraday drop since Nov. 5, erasing the company’s gains for the year.

In addition to a record level of auto recalls, Hertz said it’s incurring higher-than-anticipated operating expenses in the U.S. rental-car market and soft demand in its equipment-rental business. The company also highlighted delays with the installation of a computer system, hampering its ability to integrate Dollar Thrifty Automotive Group Inc., acquired in 2012 under Chief Executive Officer Mark Frissora.

“People’s confidence is shaken,” John Healy, an analyst with Northcoast Research, said in an interview. “The company has effectively guided down on the heels of weaker than expected 2013 results. Until they have true numbers, people are going to continue to have questions.”

The car- and equipment-rental company, which is splitting in two, has yet to report financial results from the first or second quarters. It has delayed earnings reports at least four times since it uncovered accounting errors and said it can no longer rely on its past three years of financial statements. Hertz in May reaffirmed a forecast it would earn at least $1.70 a share this year on sales of at least $11.4 billion.

Stock Downgrades

“The company now expects to be well below the low end of its 2014 guidance,” Hertz said in the filing yesterday.

Hertz’s stock was downgraded to hold and neutral by Deutsche Bank and JPMorgan Chase & Co.

Automakers in total have recalled more than 44 million vehicles in the U.S. this year, according to data on a National Highway Traffic Safety Administration website. That number has been propelled by General Motors Co., with more than 25 million vehicles recalled for safety repairs, a record, including 2.59 million cars for faulty ignition switches.

While rental-car companies aren’t required to have recalled vehicles fixed, Hertz and the other leading companies said in 2012 that they won’t send out faulty cars.

Hertz said yesterday that recall activity “stepped up substantially” in April and in June it “experienced a rapid, substantial increase in contracted bookings, further widening the gap between supply and demand.”

Leadership Changes

After cautioning that it may revise results for the current business year, the company said U.S. rental-car revenue grew 4 percent in the second quarter from a year ago.

The company withdrew guidance for its 2014 results, which it said will also be hurt by costs connected to its accounting review.

Hertz also said yesterday that Scott Sider is retiring as group president of Rent A Car Americas and George Tamke is retiring as a director and as independent lead director of the board. It designated independent director Linda Fayne Levinson as independent lead director.

Hertz’s audit committee said in June that financial statements for 2011 need to be restated, affecting figures reported in the next two years. Errors emerged when Hertz was preparing first-quarter accounts, including in capitalization and depreciation timing for “certain non-fleet assets.” It also found mistakes in accounting for money it couldn’t collect from customers who damaged vehicles or equipment.

Preliminary Results

In the second quarter, revenue at Hertz’s equipment-rental unit increased 1 percent, including currency effects, impacted in part by a lower level of new equipment and parts sales. Hertz said its sales force had not kept pace with industry demand this year and is ramping up hiring to reverse “the decelerating trend.”

The company said that the challenge to resolve the accounting issues could push the timing of the separation of the equipment-leasing business beyond the first quarter of 2015 as originally projected. Hertz outlined plans in March to spin off the unit to focus on car rentals, creating two publicly traded companies.

Share Buyback

The car-rental business will keep the name Hertz and get cash proceeds of about $2.5 billion to pay down debt and support a $1 billion share buyback, Hertz has said.

In its international operation, the company said rental-car revenue rose 7 percent, including currency effects, in the second quarter, driven by improved performance in Europe, which accounts for about 74 percent of that business.

Hertz’s woes contrast with Avis Budget Group Inc., which has benefited from the consolidation that Hertz created when it bought Dollar Thrifty. Avis on Aug. 4 raised its annual forecast for sales and profit as it has been able to charge higher rental prices for its cars in the U.S. and Canada. Avis, which had jumped 70 percent this year through yesterday, rose 0.3 percent to $68.97.

Richard Broome, a spokesman for Hertz, declined to comment on the company’s accounting review and its financial prospects for 2014.

--With assistance from Jeff Green in Southfield, Michigan.