Credit Suisse initiated Hertz with a mere Neutral rating, but because the Credit Suisse ratings metric works on a relative peer basis, it does not mean that the firm sees no upside. It is simply Neutral against peers.
To prove the point, Credit Suisse gave a $29 price target on Hertz, after the stock closed at $26.16 on Friday. This implies close to 11% upside if the price target is hit. Thomson Reuters’ consensus price target from Wall Street analysts is $30.10. Does that sound exactly like most Neutral ratings from analysts? No, it certainly does not.
If you have ever rented a car over a holiday weekend, you probably could not help but notice how much pricing power these car rental companies have when times are good. Hertz has close to 25% market share, and the competition seems to be that the providers (rental companies) all are no longer intent on price wars. Gone are the days of $18 to $22 per day.
Still, Credit Suisse took issue here. The firm said:
Our sense is that potential pricing gains are masked by overcapacity, which has not yet come out of the market despite significant consolidation. Our channel checks suggest that, as we enter second half of 2014, the overall U.S. car rental fleet should be in better shape. Recent management conversations also suggest 2014 is a transition year given integration work around DTG.
Today’s Neutral rating also warns to expect a few noisy quarters. The report said:
Although residuals can be offset by selling vehicles into more profitable channels, raising rental prices, or extending the holding period on vehicles, we believe that the fourth quarter of 2013 and the first quarter of 2014 will have incremental noise associated with high operating expenses and a wider than normal guidance range given conservatism post weak third quarter results.
On the flip side, Credit Suisse sees the chance for a greater return of cash to shareholders. The firm’s target price of $29 is based on a normalized EBITDA estimate of near $2.8 billion at target multiple of 7.5.
Sometimes an analyst call sounds as though it is fully valued on the headline, but there may still be handy upside to the underlying target. Hertz shares were down 0.5% at $26.02 in mid-morning trading on Monday.
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