By Mike Colias and Anne Steele
Hertz Global Holdings Inc. shares plunged 30% Tuesday after the rental-car company reported disappointing financial results and cut its annual outlook, raising broader concerns over the potential effect of falling used-car prices on the auto sector.
Investors dumped Hertz shares in early trading on the New York Stock Exchange following weaker-than-expected third-quarter profits reported Monday after the market closed. The Florida rental-car firm blamed steep drops in the value of its smaller cars for the earnings miss, which came in 57% below Wall Street expectations.
Hertz, which also owns brandsDollar and Thrifty, also lowered financial guidance for the year, triggering analyst downgrades. Hertz shares fell 50% at one point Tuesday before regaining ground to about $24 in early afternoon trading. The company's shares have lost nearly 60% of their value so far this year.
Hertz's subpar financial results highlight possible headwinds for auto makers and dealers already struggling to repeat last year's record car sales.
The availability of cheaper used cars dampens demand for new vehicles and could force car companies and dealers to dangle bigger discounts to keep inventory from collecting dust. That can result in dented profits. Declining residuals also increase car companies' expenses for offering enticing leases.
Chief Executive John Tague blamed Hertz's financial results largely on deeper-than-expected depreciation on small and midsize vehicles and warned of further drops in the fourth quarter. Sales of sedans, long astaple for U.S. car shoppers, are falling sharply as cheap gasoline prices send consumer flocking to pickup trucks and sport-utility vehicles.
Auto makers in recent months have been offering bigger incentives and cheaper loans to keep shoppers engaged. Car sales are off 8% through October, while truck sales of pickups, SUVs and vans rose 8% and are on track for a record high, according to Autodata Corp.
Hertz's results "will make people increasingly cautious" about the impact of lower used-car prices on new-vehicle sales and leasing, Evercore ISI analyst Arndt Ellinghorst wrote in a research note.
Still, some analysts suggested Hertz's struggles were unique as opposed to a broader industry warning sign. Falling residuals for small and midsize sedans have long been anticipated, and Hertz suffered more from higher costs and lower rental volumes, several analysts said. Rival Avis Budget Group Inc. last week reported better-than-expected vehicle depreciation and posted third-quarter financial results that beat expectations.
Hertz has struggled to turn around operations after accounting errors forced it to adjust years of financial results. In addition an equipment-rental separation that gave it a much-needed cash infusion to pay down debt, Hertz has been aggressively cutting expenses, targeting $350 million in cost cuts for the year.
Barclays Capital analyst Brian Johnson noted that deeper depreciation accounted for only about 20% of Hertz's profit shortfall versus expectations. The size of the profit shortfall and slashed guidance suggests "there are likely some ongoing execution issues," he said in a note.
"This management team may now face questions around credibility," Mr. Johnson said.
Hertz is already under investor pressure, with activist Carl Icahn controlling 15% of the company's stock. Mr. Icahn, whose employees hold three board seats, played a key role in hiring Mr. Tague to helm Hertz in 2014, pushing back against suggestions from other activist investors.
Mr. Icahn has kept adding to his stake after Mr. Tague's hiring, buying more shares in June, and continues to hold shares in the spun-off Herc Holdings Inc. as well.
Hertz's stock became an activist hotbed in 2014 when Mr. Icahn and Jana Partners LLC joined a bevy of other investors who have a proclivity to pressure management, such as Fir Tree Inc. and Glenview Capital Management LP.
Over all, Hertz's third-quarter profit fell to $42 million from $237 million a year earlier, the company reported Monday. Excluding certain items, adjusted profit was $1.58 a share, well below analysts' expectations of $2.75.
"An abysmal quarter. That's all we can say about this release," Wells Fargo analyst Richard Kwas said in a research note. While a negative guidance revision was expected, "the adjustment was dramatic."
David Benoit contributed to this article.
Write to Mike Colias at Mike.Colias@wsj.com and Anne Steele at Anne.Steele@wsj.com
(END) Dow Jones Newswires
November 08, 2016 15:09 ET (20:09 GMT)
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