Hertz at $1.45b market cap: Rental Car Business Model has upside

The issue here is gas prices. Low gas prices have reduced demand for compact and mid-size cars, which has resulted in a sharp decline in used car values. But apart from the initial hit, Hertz should be able to purchase these cars at a lower price going forward, so the hit might be a one time item.

Hertz can recover from here and the upside might be substantial. The business model is a solid one for four reasons:

a) Interest expenses are low due to fleet debt being securitized by vehicles
b) Higher depreciation expenses typically result in high car rental rates (pass through to customer)
c) Supply is rational due to there being only two big players in the market
d) Fleet can be scaled up and down and mix can be changed to influence rental rates thereby improving Adjusted Corp. EBITDA even at lower revenue levels

e) 70-75% of operating costs are variable, which means that "time" can get Hertz through difficult time

At the current price, the Enterprise Value is less than $4.55 billion. LTM Adj. Corp. EBITDA was $553 million, which puts Hertz trading at less than 8X, under pretty poor conditions. Of course the leverage here is very high and there are debt covenants, so a zero is not out of the question. But given the business model and current condition of banks / travel, bankruptcy is not on the cards, although we may see a few covenant breaches if used car prices continue to plummet.