Hertz (HTZ)

Global car rental company Hertz (NASDAQ:HTZ) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 12.8% year on year to $1.81 billion. Its non-GAAP loss of $1.12 per share was 14.6% below analysts’ consensus estimates.

Company Overview

Started with a dozen Model T Fords, Hertz (NASDAQ:HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.

The growth of e-commerce and global trade continues to drive demand for shipping services, especially last-mile delivery, presenting opportunities for ground transportation companies. The industry continues to invest in data, analytics, and autonomous fleets to optimize efficiency and find the most cost-effective routes. Despite the essential services this industry provides, ground transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.

Public competitors in the car rental industry include Avis (NASDAQ:CAR) and Zoomcar (NASDAQ:ZCAR), while a prominent private competitor is Enterprise.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Hertz struggled to consistently generate demand over the last five years as its sales dropped at a 1.8% annual rate. This was below our standards and suggests it’s a low quality business.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Hertz’s revenue over the last two years was flat, sugggesting its demand was weak but stabilized after its initial drop in sales. We also note many other Ground Transportation businesses have faced declining sales because of cyclical headwinds. While Hertz’s growth wasn’t the best, it did do better than its peers.

Hertz also reports its number of units sold, which reached 33.9 million in the latest quarter. Over the last two years, Hertz’s units sold averaged 4.1% year-on-year growth. Because this number is better than its revenue growth, we can see the company’s average selling price decreased.

This quarter, Hertz missed Wall Street’s estimates and reported a rather uninspiring 12.8% year-on-year revenue decline, generating $1.81 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 4.5% over the next 12 months. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

Hertz has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 19.2% gross margin over the last five years. That means Hertz paid its suppliers a lot of money ($80.81 for every $100 in revenue) to run its business.

Hertz’s gross profit margin came in at 0.8% this quarter, up 12.6 percentage points year on year. Zooming out, however, Hertz’s full-year margin has been trending down over the past 12 months, decreasing by 12.3 percentage points. If this move continues, it could suggest deteriorating pricing power and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Hertz was profitable over the last five years but held back by its large cost base. Its average operating margin of 7% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Hertz’s operating margin rose by 3.2 percentage points over the last five years.

This quarter, Hertz generated an operating profit margin of negative 13.5%, up 8.1 percentage points year on year. The increase was driven by stronger leverage on its cost of sales (not higher efficiency with its operating expenses), as indicated by its larger rise in gross margin.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Hertz, its EPS declined by 73.7% annually over the last five years, more than its revenue. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

We can take a deeper look into Hertz’s earnings to better understand the drivers of its performance. Hertz recently raised equity capital, and in the process, grew its share count by 116% over the last five years. This has resulted in muted earnings per share growth but doesn’t tell us as much about its future. We prefer to look at operating and free cash flow margins in these situations.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Hertz, its two-year annual EPS declines of 84% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q1, Hertz reported EPS at negative $1.12, up from negative $1.28 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Hertz’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.3%, meaning it lit $5.32 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Hertz’s margin dropped by 4.7 percentage points during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Hertz burned through $578 million of cash in Q1, equivalent to a negative 31.9% margin. The company’s cash burn slowed from $729 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Hertz hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 14%, higher than most industrials businesses.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Hertz’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Hertz burned through $1.62 billion of cash over the last year, and its $19.52 billion of debt exceeds the $1.02 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Hertz’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Hertz until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Hertz blew past analysts’ EBITDA expectations this quarter. On the other hand, its revenue missed and its adjusted operating income fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock remained flat at $5.80 immediately after reporting.

Updated: July 10, 2025 at 11:44 PM EDT

When considering an investment in Hertz, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Hertz doesn’t pass our quality test. First off, its revenue has declined over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

Hertz’s EV-to-EBITDA ratio based on the next 12 months is 6.7x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $3.99 on the company (compared to the current share price of $7.95), implying they don’t see much short-term potential in Hertz.