Hertz (HTZ): Real earnings growth

By Michael Cintolo, Editor of Cabot Market Letter and Cabot Top Ten Trader
From Cabot Wealth Advisory 5/9/13 Sign up for free Cabot Wealth Advisory
As for the current market, I generally like what I see right now. Obviously, the major trend of the indexes and most stocks remains up, but below the surface, I’m seeing more growth stocks act well, while many defensive-type stocks (which had been leading for the past couple of months) take a breather.

That said, I’m also cognizant that the environment remains very choppy—earnings season certainly has something to do with that, but so does the general market, which has whipped around a bunch in recent weeks. So there’s still a preference for big, liquid stocks that trade at reasonable valuations and have a degree of safety (or, at least, surety) to them.

Hence my recommendation today—it’s Hertz (HTZ), the gigantic car rental company whose recent buyout of Dollar Thrifty has made it the top dog in the industry. Here’s what I wrote about the company in Cabot Top Ten Trader this past Monday:

“The rapid consolidation of the rental car business has produced excellent opportunities for investors, as a gradually improving economy and more efficient operations yield higher profits. Hertz Global Holdings was featured here back in February, and Avis Budget Group (CAR) made its debut here in April. Hertz is getting a surge in investor interest from its takeover of Dollar Thrifty Automotive Group earlier this year, a move that made Hertz the top dog in the industry, as well as giving it an entrée into the lower-priced end of the rental market. The company’s Q1 earnings report on April 29 featured a 21 cent per share profit, which beat the consensus number of 16 cents by a wide margin. Revenue was up 24% to $2.44 billion, while projections were for just $2.39 billion. According to management, the integration of operations from the Dollar Thrifty acquisition is proceeding more quickly than expected. Guidance for the rest of the year was also higher than expected. With solid revenue and earnings outlook, support for the rental story from Avis and a macroeconomic push behind the rental business, Hertz Global looks like a solid winner.”

What appeals to me about this story is that there’s real earnings growth going on here; analysts see earnings leaping a whopping 44% this year, and another 30% this year. With the stock at 25, HTZ trades at just 13 times 2013 estimates … estimates that were just reaffirmed by the company’s management in the latest quarterly report.

That said, HTZ has already had a big run during the past few months, so why recommend it now? It was just announced this week that some big owners of the stock (including Bank of America and Carlyle) will sell off their remaining slug of shares they’ve been holding, worth about $1.3 billion. All told, we’re talking about nearly 50 million shares.

In the short-term, such an offering could put a lid on the stock; if the market pulls in for a few days, it could even take the stock a few points lower. But long-term, I think this move removes some lingering overhead and will help move the stock to stronger hands.

Bottom line, I think the stock is buyable around here or, preferably, on a pullback of a point or two. If you buy, I advise using a straightforward 10% loss limit to start.

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