JPMorgan Downgrades Hertz, Forecasting Challenging Road Ahead for Car Rental Company

JPMorgan has downgraded Hertz Global Holdings (HTZ) to Underweight, citing a lack of significant company-specific drivers for higher earnings. Analysts highlight the $1 billion losses from Hertz's electric vehicle transition, including devaluation of used EVs and expensive repairs. JPMorgan lowers the 2026 earnings forecast to $400 million, predicting no positive free cash flow for 2024 and 2025. Volatility is expected, with Hertz not expected to return to normalized earnings before 2026.

According to a recent research note from JPMorgan, Hertz Global Holdings (HTZ) has been downgraded from Neutral to Underweight due to concerns about the company's electric vehicle (EV) transition and lack of significant drivers for higher earnings [1]. This downgrade comes amidst a challenging environment for the car rental industry, with Hertz reporting a net loss of $865 million in the second quarter of 2024 [2].

The EV transition has been a major factor in Hertz's financial struggles. According to the JPMorgan analysts, the company is expected to incur $1 billion in losses from the devaluation of used EVs and expensive repairs [1]. This is a significant concern for Hertz, as the company had previously announced its plans to accelerate its fleet refresh to provide vehicles aligned with customer needs [2]. However, this accelerated refresh has resulted in higher depreciation expenses, which have contributed to the company's negative earnings and cash flow.

Despite Hertz's efforts to improve its operational performance and generate sustainable returns, JPMorgan predicts that the company will not return to normalized earnings before 2026 [1]. This is due in part to the volatility expected in the car rental industry, as well as the challenges associated with the EV transition. Hertz has reported a decline in revenue per available day (RPD) of 3% year over year in the second quarter, which moderated to 2% in June [2]. This decline, along with the high depreciation expenses, has led to negative corporate liquidity and a negative adjusted free cash flow.

Hertz's CEO, Gil West, remains optimistic about the company's future prospects. In a statement released after the second quarter results, West said, "We're moving quickly with a best-in-class leadership team, a strategy laser-focused on delivering sustainable returns and elevating our operational performance across the business" [2]. However, JPMorgan's downgrade suggests that the challenges associated with the EV transition may be more significant than previously anticipated.

In conclusion, JPMorgan's downgrade of Hertz Global Holdings highlights the challenges associated with the EV transition in the car rental industry. With higher depreciation expenses and volatile earnings, Hertz may face significant challenges in returning to normalized earnings in the near future.

References:
[1] JPMorgan downgrades Hertz Global Holdings to Underweight. Reuters. (2024, August 5). https://www.reuters.com/business/autos-tires/jpmorgan-downgrades-hertz-global-holdings-underweight-2024-08-05/
[2] Hertz Global Holdings, Inc. Reports Second Quarter 2024 Results. PR Newswire. (2024, August 1). https://ir.hertz.com/news-releases/news-release-details/hertz-reports-second-quarter-2024-results