Carl Icahn Boosts Stake in Hertz as Stock Price Declines Sharply

On June 3, Carl Icahn (Trades, Portfolio) of Icahn Enterprises added 1.54% to his Hertz Global Holdings Inc. (NYSE:HTZ) position at an average price of $9.90 per share. The chairman of the limited partnership holding company currently has 64,693,012 shares of the stock.

One likely reason why Icahn increased his Hertz position is because the company’s stock price decreased sharply throughout the past two years and is near 52-week lows.

An activist investor since the 1980s, Icahn targets companies that have “deeply depressed prices,” according to his May investor presentation. In addition to investing in companies with low prices, Icahn and his board of directors actively influence the target’s management to improve the company’s business and shareholder value. This increases the holding company’s potential for stronger returns year over year.

Icahn currently holds stock positions in an eclectic and diversified set of industries. As of March 31, the holding company’s investment segment has significant positions in various company stocks including Hertz. Based on the chart below, Hertz is currently trading near $11 per share, which is about 33% of its all-time high of $30 per share.

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The chairman of Icahn Enterprises targets companies that are “not glamorous and usually out of favor,” according to the GuruFocus article on guru stocks at 52-week lows. Companies “out of favor” tend to be those that recently experienced dramatic stock price declines in recent years. According to the article, the stocks in which to invest among those that are at low prices are the ones not expected to decrease further in price. Although Hertz is in distress zones based on its Altman Z-score, the company has a financial strength rating of 6 out of 10, suggesting that Hertz still has potential to survive economic downturns and grow.

With a return on equity of 13.10%, Hertz has a higher ROE than 72% of companies in the global rental and leasing services industry. Although the car and truck rental company had negative returns on equity near 2009, Hertz had at least a 13% ROE in both 2014 and the first quarter, its highest return on equity to date. This suggests that Hertz is slowly recovering from its recent downturn.

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The management at Hertz Global Holdings suggests several reasons why the company has potential to recover, as stated in the company’s recent 10-K. The most likely reason for the company’s potential upside is that Hertz had income before taxes of $341 million in 2015, much better than $82 million pretax loss in 2014. During 2015, Hertz management successfully cut total expenses due to favorable exchange rates and decreasing fleet expenses.

Additionally, the firm realized a $116 million gain on the sale of CAR Inc. and the HERC business in Spain and France. Despite having an $82 million pretax loss in 2014, Hertz had an adjusted pretax income of $403 million in 2014. For the year ended Dec. 31, 2015, the firm had an adjusted pretax income that is $171 million higher than its adjusted pretax income in 2014.

The only consulting and outsourcing company that is currently trading at prices near 52-week lows is Fly Leasing Ltd. (NYSE:FLY), according to the 52-week low screener. Despite having a higher profitability and growth rating than Hertz, Fly Leasing has a weaker financial system. With a financial strength rating of just 4 out of 10, the aircraft-leasing company is more likely to go bankrupt during an economic downturn.

Fly Leasing’s Beneish M-score presents a likely reason why the company has a weak financial system: with an M-score of -0.41, Fly Leasing likely has manipulated its financial results, suggesting that its financial data are most likely inaccurate. Furthermore, the aircraft-leasing company has a lower Altman Z-scores than does Hertz, indicating that Fly Leasing is more likely to go bankrupt.

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Many gurus, including Carl Icahn (Trades, Portfolio), are adding to their positions in Hertz Global Holdings despite the modest financial outlook. During the quarter ended March 31, two other gurus significantly increased their positions in Hertz: Larry Robbins (Trades, Portfolio) (Trades, Portfolio) of Glenview Capital Management added 19.39% to his position while Mario Gabelli (Trades, Portfolio) (Trades, Portfolio) of GAMCO Investors added 29.40%. These two investors currently own 27,703,449 and 5,152,932 shares in Hertz.

To search for other good stocks in the consulting and outsourcing industry, use the All-in-One Screener. Within this screener, you can filter stocks with certain criteria, for example, stocks that have high Altman Z-scores, stocks that have reached 52-week lows, etc.

— Guru Focus

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