Sam's picks

Electric vehicles are undeniably the thing of the future. They will help auto manufacturers generate substantial profits, and they also appear to be helping Hertz Global Holdings (HTZ), a car rental company that is seeing increased margins thanks to this new technology.

While the company looks to be on the right track, does it deserve a spot in your portfolio?

You may have questioned my judgment if I had suggested Hertz as an investment a few years ago. Weighed down by debt and pandemic slowdowns, the company fell into bankruptcy in 2020, and it seemed as though it would soon be lost to history. However, it has since emerged and is now stronger than ever.

Looking at the car rental industry, three major players account for 90% of the U.S. market, Hertz Global Holdings, Avis Budget Group and Enterprise Rent-a-Car. The market was valued at $119 billion in 2021 with a projected compound annual growth rate of 11%, bringing the 2027 estimate to $223 billion.

The COVID-19 pandemic took its toll on this industry, stunting its growth and placing companies such as Hertz in desperate situations. People were staying home, leading to record lows in bookings. However, the industry is on track to recover from the pandemic’s effects with North America projected to dominate the global car rental market in terms of revenue.

While this is good news, some investors are skeptical, as company earnings are expected to drop by about 40% this year compared to last, because of a cooling market and the company’s plan to overhaul its fleet and add new vehicles to the line.

Many of those new vehicles are likely to be electric, as they already make up around 10% of the company’s current fleet. Hertz officials also announced that it plans to grow that number to 25% next year.

While it will likely be costly to electrify the fleet, it will be well worth it. Electric vehicles already available earn premiums of $25 to $30 per day. Electric motors are more simple than traditional combustion engines and therefore require less maintenance, saving Hertz money in the long run.

The company has been leading its peers in the market since it emerged from bankruptcy following the pandemic, buying back around 30% of its stock. In 2022, Hertz generated $8.69 billion in revenue. However, with that 18% growth also came a bigger rise in cost of goods, up to $5.65 billion last year, putting gross income just over $3 billion.

While those numbers do not look stellar, one number that does is the company’s 463% growth in net income, which is not a typo. Amazingly, Hertz was able to book $2.06 billion in this category for 2022, up significantly from the meager $366 million in 2021 and the abysmal minus-$1.71 billion in 2020.

This is a number investors love to see, as it shows Hertz is not only on the right track following its bankruptcy but chugging ahead at a remarkable pace, as evidenced by its net margin of almost 24%, up from around minus-33% at the end of 2020.

Hertz currently trades at a profit-to-earnings ratio of around 5, meaning that it is relatively cheap, trading at only five times its current earnings. Even better, Chief Financial Officer Kenny Cheung stated “everything is on the table” regarding a potential dividend, which would make the stock even better.

If you are not looking to invest in the company right away, Hertz warrants may be the move for you. A warrant is a derivative contract issued by a company that gives an investor the right to buy or sell shares at a specific price before a specific date.

As stated in section 2 of the company’s warrant agreement filed with the Securities and Exchange Commission in June 2021, the exercise price is set at $13.80, with the warrant expiring in 2051, according to section 7. These warrants essentially give investors the chance to get in on Hertz while also limiting their risk.

Overall, Hertz stock is on its way up after the company is showing more profitability following its bankruptcy. With new investments in EV vehicles, margins should continue to improve, generating stronger earnings for investors.

Whether you want to buy shares now or wait with warrants, investing in Hertz is a bet you will be happy you made.

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