HERTZ-Group5-FinalReport

Greenback Securities This report is published for educational purposes only by

students competing in Fordham University Equity

Research Competition.

Date: January 3, 2015

Industry: Rental And Leasing

LETS GET THE ENGINES STARTED………

We issue a Buy recommendation on Hertz with a one-year target price of

$35.42 using the Discounted Free Cash Flow to Firm Method. This offers

a 41.57% increase from its closing price of $ 25.02 on Jan 2th, 2015.

Year Revenue EBITDA EBIT PAT EPS P.E

2012A 9,025 3,416 1,175 243 0.54 46x

2013A 10,772 4,151 1,501 346 0.77 32x

2014P 11,689 4,138 1,145 409 0.91 27x

2015P 12,574 4,460 1,241 472 1.05 23x

2016P 13,645 4,851 1,357 559 1.25 20x

2017P 14,828 5,283 1,486 645 1.44 17x

2018P 16,133 5,760 1,629 774 1.73 14x

Main growth drivers include:

Recovering economic condition in the U.S that fosters the Airline

industry, directly and positively impacting Hertz’s main business

segment – Car rentals

Increasing internal revenue drivers due to synergy with China Auto

Rental and Dollar Thrifty Automotive Group

Increasing operational efficiency from management with cost

reduction

The promising spin off of Hertz’s equipment rental business

Main risk include:

Residual risk

Reduction in the levels of airline passenger travel

Increase in Car-Sharing Rentals (Zipcar)

Hertz Share Price Data

19

21

23

25

27

29

31

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15

Ticker: NYSE: HTZ Recommendation: Buy

Price: 25.02 (Jan 2, 2014) Target Price:$35.42

Time Horizon: One Year

HERTZ GLOBAL HOLDINGS (‘HERTZ’)

Market Profile

Closing Price (USD) 25.02

52-Week Range 31.6-18.5

Share Outstandings (M) 447.7

Market Cap (M) 11,201

P/E 27

EV/EBITDA 5.85x

Source: Yahoo Finance, Thompson One, Team

Estimates

Analyst Forecast

Target

Mean 25.14

Median 25

High 32

Low 16

Std. Dev 5.67

Total 7

Source: Thompson One

Analyst Comparison

# of

Brokers

Strong Buy 3

Buy 1

Hold 3

Underperform 1

Sell 0

Total 8 Source: Thompson One

Ter

min

al

Gro

wth

Ra

te WACC

7% 7.61% 8%

3% 38.68 28.65 23.44

3.5% 48.03 35.42 29.05

4% 60.51 44.07 36.06 Source: Team Estimates

Jan - 16

Target

Price:

$ 35.42

Greenback Securities January 3, 2015

2

Investment Summary

We issue a Buy recommendation due to four factors, (1) Stable U.S. economic condition

that fosters the Airline industry, which directly and positively impacts Hertz’s main

business segment – Car Rental, (2) Increasing internal revenue drivers due to synergy

with China Auto Rental and Dollar Thrifty Automotive Group, (3) Increasing operational

efficiency from management with cost reduction, and (4) The promising spin off of

Hertz’s growing business in equipment rental.

Cheap oil, cheap ticket, flying revenue

Car rental demand depends on air travel, which in turn is affected by the health of the

national economy. During recessions, car rental revenue often mirrors declines in air

passenger traffic. Car rental companies also see seasonal changes in business depending

on their location and the type of traveler they serve. A large portion of Hertz’s business is

generated by airport traffic, as their on-airport facilities are extesnsive. 29% and 10% of

Hertz’s revenue comes from U.S. on-airport business for leisure and commercial

purposes respectively.

Lower jet fuel prices and an improved economy has created a positive environment

within the airline industry. After reaching its peak at $3.3 per gallon in 2011, Jet Fuel

prices gradually decreased over the past few years, and currently sits at $2.4 per gallon.

Lower Jet Fuel allows airline companies to offer more affordable air transportation to

customers. The Passenger Load factor, which measures capacity utilization of Jet Blue

and U.S airlines industry, signifies a good increasing in seats fillings air cargo from

around 81% in average to 83.6% in 2017. We choose JetBlue to examine the airline

industry because JetBlue has a huge market share in the U.S. and they also have moderate

operation in Latin America like Hertz. In addition, Hertz’s Investor Relations indicates

that JetBlue is a major airline partners.

We collect and calculate correlation of 0.90 that indicates a highly positive correlation

between sales data of Hertz and the Airline industry. Estimated sales of the airline

industry data for the next three years will be around 5% and we expect Hertz’s revenue to

grow similarly.

Who buys car in China anyway!

Hertz partner China Auto Rental CAR Inc., is the largest car rental company in China

which operates 717 rental locations in China, 52,498 vehicles until 6.30.2014. There are

three main drivers for these market increments:

Increased spending on travel by business and domestic tourists due to economic

growth

High urbanization rates, the high costs of owning and driving a car, and

government policies curbing private car usage increase the demand of car rents.

High level of consolidation due to competitions in recent years enhance the

efficiency of car rental market

Customer numbers grow from 450,000 in 2012 to 1,962,000 in 2014, which increased

3.36 times. The annual compound growth rate for customer is 80%. The market shares of

CAR in 2013 was 31.2%, however the second and third largest competitors are 8.2% and

In Million 2009 2010 2011 2012 2013 2014 2015 2016

Sales HTZ 7,101.51$ 7,562.53$ 8,298.38$ 9,202.81$ 10,771.90$

Sales Airline Industry 113,304.81$ 119,319.92$ 144,367.27$ 149,769.72$ 154,856.11$ 161,653.78$ 168,746.00$ 172,006.31$

Source: IndexMundi

Airlines EPS Growth YoY

Source: FactSet, Team estimates

US Airlines Load Factor and

Passenger yield

Source: FactSet, Team Estimate

China Leasing & Rental Index

Source: FactSet

8.8

9

9.2

9.4

9.6

9.8

10

10.2

10.4

10.6

81%

82%

82%

83%

83%

84%

84%

2011 2012 2013 2014 2015 2016 2017

Load Factor Passenger Yield

11.00

11.20

11.40

11.60

11.80

12.00

12.20

12.40

12.60

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

China / Finance/Rental/Leasing -IND - Price (Left)

China - Retail Sales (YoY%) (Right)


3

1.9%. The total market of CAR is greater than the sum of next 9 competitors’ market

share.

Recently, CAR made an overall discount promotion in China on Oct 9th, using the money

raised from an IPO of about 4 billion Hong Kong Dollars on the Hong Kong Stock

Exchange. This price strategy will help CAR to gain greater market share since China’s

car rental market is price sensitive.

China’s car rental industry is one of the fastest-growing markets in all the BRIC nations,

which has a CAGR of 32.03% during 2007 to 2011 according to the BRIC data analysis.

The market is expected to grow at a CAGR of 16% in the next three years.

According to the income statement of CAR, we use last six month sales and last year’s

six month sales to calculate the growth rate in 2014. We assume that the next six months

sales in 2014 will stay the same growth rate. Then we can use the growth rate of sales of

2014 and sales in 2013 to estimate that the total revenue for CAR in 2014 would be ￥

4,375,872,000, which is $716 million.

Hertz’s Outstanding Brand Awareness

The market share of Hertz before acquisition was 25% of the U.S. airport market

behind Avis Budget Group, which has 26% of the market. Dollar Thrifty controls 12% of

the market share and Enterprise has 34% of the market. After acquisition of Dollar

Thrifty, Hertz became the largest airport car rental business with 37% market share,

giving them the greatest coverage at major U.S. airports.

The acquisition synergy helps Hertz to achieve diverse global portfolio and differentiate

customer targeting. Joining forces with Dollar and Thrifty enables Hertz to buy cars more

efficiently, to generate higher utilization, and to scale the benefits of increasingly diverse

vehicle re-marketing channels.

Another advantage of acquisition is to increase gross margin by offering differentiated

product lines to specific customers. The customer of Dollar Thrifty is a low-end customer

while Hertz targets at high-end customers, which gives Hertz the power to increase

product price without losing market shares. After acquisition of DTG, the gross margin of

Hertz increases to 28.9% in 2013 from 22.95% in 2012. The Gross margin in LTM as of

06/30/14 is 30.3% according to Thomson One.

Margin Expansion

Hertz’s management has always embraced efficiency and constant improvement as its

core values. The firm utilizes Lean/Six Sigma principles to streamline business processes,

which results in lower expenses and higher quality services. Also, new design for

operations management has been implemented, by adding 44 large rental locations

globally last year. Hertz’s 2013 annual report shows impressive operating efficiency and

cost reduction.

Increases in expenses may be attributed to to recent acquisitions, developments of off-

airport sales forces, and additional brand advertising. However, total expenses compared

to revenue is decreasing over the year from 96.3% in 2011 to 95.1% in 2012 and 93.8%

in 2013. One of the major improvements is SG&A expense, which reduced to 9.5% from

10.7%. The decrease was primarily driven by synergies achieved from the Dollar Thrifty

integration. Regarding the M&A with Dollar Thrifty, Hertz’s management board

expected to have a $300 million cost synergy for three years length. In 2013 annual

Chinese CAR Revenue

Source: Company data, BRIC

analysis, Team estimate

U.S Airport Market Share Before

and After Dollar Thrifty Acquisition

Source: Company data, Auto Rental Industry

HTZ Margin

Source: Company Data

84

136

163

196

0

50

100

150

200

250

2013 2014 2015 2016

CAR (Chinese) Total Revenue ($Mil)

Linear (CAR (Chinese) Total Revenue ($Mil))


4

report, Hertz announced that the firm achieved over $130 million of cost savings which

exceeded the $100 million target. Hertz’s target this year will be $200 million of cost

savings and we believe the firm will be able to achieve this due to its excellent track

record.

We collected and plotted data showing Hertz’s record of operational efficiency

improvement over the last ten years. After two bad years in 2008 and 2009, Hertz’s Gross

and Operating Margin gradually increasing while its SG&A margin decreased. 2013 is an

impressive year for Hertz with only 9.5% in SG&A Margin and 23.5% in Gross Margin.

With ongoing cost reduction program, new operation design and cost synergy with Dollar

Thrifty, we expect the trend will continue in the next year.

Will HERC become a giant?

Realizing the growth prospective of its equipment rental business, Hertz’s management

board decided to spin off the business in order to create stronger growth profile and more

competitive position for each company. The company also announced the intention to

maintain a target net leverage ratio of 2.5x to 3.5x net corporate debt/ corporate EBITDA.

Hertz’s equipment rental business revenue has an average growth rate of 12% in the last

three years. The business segment is also diversifying its revenue into oil and gas

exploration and extraction.

The increase in HERC revenue is primarily due to increases of 12.3% and 3.6% in

worldwide equipment rental volumes and pricing respectively. According to the recent

annual report, the increase in volumes was due to strong industrial performance,

especially oil and gas related. Data indicates that oil production and consumption is

growing over time and demand for oil does not show any weakness. We know that oil

price is plunging but we also know that recent OPEC gave no decision on restricting the

amount of oil production. In addition, with current economic situation in Russia, one of

the big oil exporters, we believe that production won’t slow down. As a result, demand

for oil and gas exploration and extraction will increase, which will positively impact

HERC’s revenue in the future.

Another major impact on HERC business is construction spending. According to reports,

more and more companies choose to rent construction equipment rather than buying them

due to cost-effective reason as well as other factors such as the length of the job, the

difficulty of transporting a piece of equipment to jobsites, and the likelihood of winning

additional projects where that particular piece of equipment will be used.

Due to the nature of Hertz’s operation, it’s easy to find the correlation between Hertz’s

stock price and the U.S.’s Housing Starts data. Since the Housing Starts data has

stabalized, we believe that the equipment rental business will continue its impressive

growth rate of 12%.

Regarding operational efficiency and cost reduction, HERC also improved dollar

utilization of its equipment fleet by 90 bps and reduced out-of-service equipment by 220

bps last year according to the annual report. In addition, HERC continue to achieve better

operation management by using Lean/Six Sigma principles and practice as well as

launching the “Hub and Spoke” program to increase productivity and customer

satisfaction.

Housing Start Index

Source: Gov Census

World’s Construction Industry

Source: FactSet, Team Estimate

Oil Production

Source: FactSet

0

5

10

15

20

25

30

0

200

400

600

800

1,000

1,200

1,400

1,600

2011 2012 2013 2014 2015 2016

Thousands

Sales Earnings Per Share


5

Business Description Hertz is one of the premier brands in the rental car industry. In the car-rental business

segment, the company and its independent licensees and associates operate

approximately 11,555 locations in 145 countries. According to Hertz, it has the leading

airport car-rental market share, by overall reported revenue, in the United States and at

the 120 major airports in Europe. The company also estimates it has the second- largest

market share, by revenue, in the on-airport car-rental market in the United States. In the

equipment- rental business segment, the company rents through 335 branches worldwide.

Hertz has been in the car-rental business since 1918 and in the equipment-rental business

since 1965.

Hertz owns a 19% stake in China Auto Rental, which is the largest car rental company

that occupied 31.2% market shares in China. With 20% growth rate in Chinese car rental

market in next five year, CAR will generate $716 million total revenues in 2014, $859

million in 2015, $1,031 million in 2016, which will contribute $136 million revenues for

Hertz in 2014, $163 million in 2015, $196 million in 2016. Besides, the benefit of the

synergy will increase international customer service because those companies would

share customer information and service networks.

In 2012, Hertz acquired Dollar Thrifty Automotive Group for $2.3 billion. The

acquisition generates long-term benefits for Hertz both on a strategic level and in

diversifying its global portfolio. The synergy of acquisition of DTA is believed to have

100 million revenues in 2013 and 300 million revenues in next three years according to

the CEO’s letter. On the other hand, the company anticipates at least $160 million of

annual cost synergies from the transaction.

Economic Analysis

Recovery bring more revenues

Despite other revenue drivers, economic recovery plays an important role on the increase

of Hertz revenue, especially in the United States where 73% of revenues were generated

in 2013. Car rental demand depends on air travel, which in turn is affected by the health

of the national economy. The correlation between Gross domestic product in U.S. and

domestic traveling is 0.96, which indicates a strong, positive relationship. In addition, the

revenue generated from U.S. car rental has 0.9 correlation with sales of airline industry,

which supports the idea that the passengers generate due to GDP growth will contribute

the revenue growth for Hertz.

We expect Hertz revenue to continue expending from current $10.7B to $16.1B due to

1) Healthy economy provides sound environment for car rental. Although world

economies still struggle from the problems left by the Great Crisis, the recovery starting

to take hold to advanced economics is becoming boarder, such as U.S. and U.K. In U.S,

civilian unemployment rate decreases from 10% in Oct, 2009 and reaches to five year

low at 5.8% in Nov, 2014. Real personal consumption expenditures increased 3.2 percent

in the third quarter, compared with an increase of 2.5 percent in the second. US GDP

growth rate in second quarter 3.9% and third quarter 5.0% of 2014 are beating previous

estimates and market expectations. Together with other recovery indicators, we assume

that the U.S. economy gain a strong recovery and will continue to be better in 2015. As

for Europe, except United Kingdom which made great economic progress with 2.5%

HTZ Revenue

Source: Company data, Team Estimates

Sales of HTZ and Airlines

Source: SEC Filings, FactSet

GDP Annual Growth Rate

Source: World Banks & Team

Estimate


6

estimate GDP growth rate in 2014, most of the countries enter a period of stagnation or

even worse, causing by the Great Crisis and debt issue. However easing monetary policy

stimulus by ECB still can carry economies with positive recovery.

2) In Asia, China continues to maintain high annual GDP growth rate at 7.4 % in

2014 and estimate to be 7.2% in 2015 cause by the world potential growth downturn,

which is consistent with forecast by IMF.

3) Crude oil price free falls. Crude oil price drops from $100 in September to current

$60 per gallon, leading other types of oil decrease, such as jet fuel which decreases from

peak $3.3 in 2011 to currently $2.4 per gallon. Lower oil price drives U.S. economy

growing and encouraging more traveling by airline and car. Airline ticket price will

gradually decrease in 2015 because cost of jet fuel, which consist 31.5% of operating cost

of airline industry, will largely decrease, causing expansion and price war in next few

years according to strong positive airline ticket price to oil price elasticity in the past.

However, due to the oil price hedge, lessons from airline history, and 85% fill in seats,

there is no need for airline industry to offer better deal immediately at current ticket price.

4) Traveling preference shifting. The annual growth rate for US citizen traveling

increases from -3.8% in 2010 to 1.4% in 2013. However, the monthly growth rate

increases dramatically after April 2013 from -3.5% to 7.3% in September 2014. Those

numbers indicate that there is increasing number of U.S. citizens traveling after the

economy recovery and we believe the growth rate will maintain at 8%, which indirectly

support our recommendation

Big pile of cash in equipment

The US commercial and industrial equipment rental and leasing industry includes more

than 8,000 companies with combined annual revenue of about $50 billion and it’s heavily

depended on the economy. Emerging economies are forecast to grow 4.8 percent in 2014,

according to the Conference Board. In contrast, we expected developed economies to

only grow 2.2 percent.

The first rate hike in 2015

Regarding the loan rate, Hertz’s operation utilizes a large amount of financing for their

fleets. The data collected shows a slightly increase of loan rate for new car loan from

commercial banks. U.S economy is currently in a better condition compare with other

countries like Russia, Japan, and the European Union. Japan and European Union are

copying what the Feds did in 2009 issueing a series of quantitative easing to pumps

money in the system, while Russia struggled to fight inflation due to weak economy and

bottom low oil price. We expect that attracting capital inflow by increasing interest rate

with appreciated exchange value will probably be the next step by the U.S government.

Like many analysts, we predict that interest rate will be stable this year and pick up

slowly, the first interest rate hike will be around June 2015.

Rentals companies and Auto Resale Values The profitability of rental companies is sharply affected by the difference between new

and used car and truck prices. Even companies that acquire cars through guaranteed

residual value programs eventually see larger spreads between acquisition and residual

values if used car prices are weak. We can see that the data on USA vehicle sales is very

heavily correlated with the Hertz stock price. It could be explained due to the fact that a

small portion of Hertz earnings comes from car sale. Also, if the public buy more car

according to the Personal Expenditure Consumption and Vehicle Sales data, dealer would

be more interested to enter in sell-buyback contract with more benefit cost advantage to

Hertz

Gasoline and Crude Oil Price ROC

Source: IndexMundi

Monthly Change – US Citizen Travel

Source: National travel

US Govt 10 Yr & Fed Fund Rate

Source: FactSet

0

1

2

3

4

5

6

US Govt Yield - 10 Yr Fed Fund Target Rate


7

Industry Overview and Competitive Positioning

Fleet management: Brand and Size are all that matter

Even though Hertz Corporation is usually considered a high-end service with expensive

fee, the firm actually has the most diverse business segments among the competitors. The

classic Hertz brand operate in a high-end segment of the car rental industry, offering

excellent service with premium experience. In 2012 the company acquired Dollar and

Thrifty giving customers option to choose a budget-friendly and high quality service in

the middle-end segment. In 2013 Hertz introduced Firefly car rental, a cost-friendly brand

with significance value.

As the end of 2013, Hertz has 524,500 cars in US combined with 179,500 internationally

compare to 342,000 cars in the U.S and 145,000 cars internationally of Avis Budget.

According to data we found on auto rental, the market size of car rental industry is $24.5

billion dollar in which Hertz and its main competitors Enteprise and Avis has 25.7% and

34% and 21.2% in market share respectively. Hertz completed more than 34 million

vehicle rental transaction worldwide in 2013. We expected Hertz to continue maintaining

its position and gradually gain more market share as our economic forecasted growth.

Revenue per day, Revenue per transaction

Hertz shows a great improvement in terms of fleet management by increasing its’ Total

Revenue Per Transaction Day (RPD) to $47 in 2013 from $46.33 in 2012 compares to

$40.55 in 2013 and $40.22 in 2012 from Avis. The international operating data is even

more impressive with Total RPD reaches $53.81 compares to $42.48 from Avis Budget

Car in 2013. Forecast on total U.S car rental RPD decreased 4% over year in 2014 and

Hertz total RPD will be decreased 2% according to investor relations.

Non - Program Mix and depreciation advantages

Hertz is on its way to find the optimal mix between program and non-program casr in the

fleet. Non-program cars (risk vehicles) allow Hertz to be more flexible with holding

terms that can generate more incremental savings. Currently risk vehicles accounted for

80% of Hertz’s U.S operating fleet compare to 65% from Avis, which gives Hertz a

competitive advantage on holding period. Due to recent announcement, we expect Hertz

to decrease the percentage of risk vehicle to 70%. The new mix might offset the holding

period yet will maintain the depreciation rate. Hertz’s car rental depreciation rate is

26.9% in 2012 and 26.3% in 2013 compare with Avis at 27.8% in 2012 and 31.7% in

2013. With the new optimal mix we expect Hertz depreciation rate to say around 26% in

the next year.

Table Reserved

The barrier for entries is high since the industry require high capital and high investment

costs. Existing companies all have economic of scale and brand recognition over a long

period of time. Unconventional with innovative strategy like Uber account for a very

small market share since the business main competitor is taxi and cab. In addition, Uber

has received a lot of criticism and even charge to stop operating business in Indiana.

Locations U.S. and International

Source: Company Info


Fleet size

Source: Company info

Source: Team analysis


8

Valuation

We have valued the company with a DCF model using free cash flow to the firm

supported by comparables multiple pricing model. The DCF model is the most

appropriate method to value the company as the company is fairly leveraged and

produces a healthy free cash flow.

Our DCF analysis gives us a price target of $ 35.42, the price derived from perpetuity

growth method. We have used a growth rate of 3.5% to determine this price target. The

major factors to the model flowing from;

1. Revenue Estimates and Margin Estimates: We are certain that the compay can

maintain a 8.38% CAGR from 2013 to 2018 primarialy because of an improvemet in the

GDP in the US and an increase in airline travel making better opportunities for Hertz to

grow. The equipment rental business is also bound to see a good growth worldwide due

to more higer spends on construction activites worldwide and in the US.

2. Free Cash Flows: We expect the company to generate healthy Free Cash Flows from

2014 to 2018 as shown below.

3. WACC: Our WACC calculation of 7.61% was calculated with the following inputs.

We have derived the cost of equity using the CAPM model. Since we are building a 5

year DCF model, we have taken the 5 year US treasury bond yield of 1.65% as the risk

free rate plus a premium of 1% as we are of the view of the yields increasing in coming

years. We have a risk premium of 6.85%, calculated form the historical S&P returm

minus the risk free rate. We have derived our beta of 1.65 as an average of the beta of

the stock in comparison with S&P 500 for the last 3 years. The cost of debt of the

company is based on the yield of the B+ rated bonds, currently at 5.03%. The post tax

cost of debt is 3.27%.

Cost of Equity: 13.92% Cost of Debt: 5.03%

Risk Free Rate: 2.65% Tax Rate: 35%

Expected Market Return:9.5% Post Tax Cost of Debt: 3.27%

Beta: 1.65

WACC: 7.61%

4. Peer group Pricing: The mean EV/EBITDA multiple for the peer group of the

company was 6.8x while the median EV/EBITDA multiple was 7x. On this basis, we

feel it is right to give Hertz an EV/EBITDA multiple of 7x. At an EV/EBITDA we get a

target share price of $ 37.83 which supports the target price obtained through perpetuity

growth method.

Year Est. FCF

2014 $1,219

2015 $1,182

2016 $1,288

2017 $1,407

2018 $1,538

Source: Team Estimates

WACC

Cost of Debt 5.03%

Tax Rate 35%

After-tax Cost of

Debt 3.27%

Cost of Equity 13.92%

Source: Team Estimates


9

5. M&A valuation Method: Another way to evaluate the value of Hertz is through

historic industry M&A. Through our M&A valuation model based on six most

influential deals in the industry, we come up with price of $39.41 which is 57.51%

upside potential. The basis of the model is to value Hertz if it is been taken over.

Using four valuation multiples in each deal and current year’s sales, EBITDA, EBIT,

and EPS from Hertz, we equal weight each deal value and come up with $39.41

which supports our DCF model $40 with buy recommendation.

Estimate Price

Over(Under)

Valued

RSC Holding Inc $45.0 80%

Dollar Thrifty $12.9 -48%

Avis Europe Plc $17.9 -28%

Zipcar Inc $88.8 255%

US Rentals $19.6 -22%

Bucyrus Int. $52.2 109%

Average $39.4 58%

Financial Analysis

US Market continues to be driving revenue source

Hertz revenue growth continues to be driven by the by it rental business is both the

Americas as well as other developed or developing nations such as those in Europe and

Asia respectively. Despite the economic slowdown in both Europe and Asia, the United

States generates the core business revenue. We expect global revenue to grow for both

the car and equipment rental business at a CAGR of 16.92% and 17.45% respectively

through 2018 as well as net income at 18.08%.

Hertz as previously mentioned has focused on their push towards “risk” or “non-

program” vehicles, notably within the US (See exhibit XX). Such vehicles, due to the

increased holding periods allow the company to spread depreciation expense over a

greater period. These vehicles also allow for greater flexibility when it comes to

disposition and provided the opportunity to turn these assets into profit through car sales.

We forecast HTZ to expand their EBIT margin to 10.10% by 2018. This expansion is

largely being driven by an increase in the diversity of their fleet. HTZ continues to strike

deals outside of the traditional Ford and GM partnerships with companies such as Nissan,

as well as Porsche to the “dream fleet”. This increase in automobile options allows HTZ

to gain bargaining power thereby increasing their margins. The increased purchasing

power, coupled with lower automobile prices directly reduces depreciation expense on a

per car basis.

Segment CAGR

Worldwide car

rental 16.92%

Worldwide

equip. rental 17.45%

Source: Company

2013 2012 2011

A 0.91 0.95 0.83

B 0.76 0.79 0.75

A) % of non-program U.S. rentals

B) % of non-program Int'l rentals

Source: Company


10

Cash Flow

With a current debt to capital ratio of 85.48, the company’s credit rating has been held

below investment grade. HTZ will see increased FCF of $5.4bn through 2018. This

increased cash flow will allow the company to pay down a portion of their $16bn in debt

even before the potential cash influx from the spin-off of the HERC business.

Approved in mid-2014, HTZ’s spin off of the HERC business will allow HTZ to reduce

their Net Debt/ EBITDA as well as potentially improve their credit rating to investment

grade once they meet their leverage ratio target range of 2.5x to 3.5x as earlier noted. In

addition to the debt pay-down, management has a plan in place to return cash to

shareholders of up to $1bn in share-buybacks into the future. A buy back of even half this

amount would equate to a potentially $.04 increase in EPS from current levels at our

price target of $35.42 all else being held constant.

Balance sheet growth

HTZ cash balance we estimate will continue to grow to $4.3bn into 2018. As of the most

recent financial reporting period the company had a cash ratio of .58 which is up 22% vs.

the prior year and also 32% higher than their closest competitor, Avis.

Dupont Analysis

We analysis HTZ’s profitability to demonstrate the return on equity shareholder by 3

steps and 5 steps DuPont Analysis. During 2009 to 2013, ROE for HTZ increased from -

6% to 12.5 % at the CAGR of 20%. The increase of ROE during this 5 years mainly

came from profit margin, which increased from -1.8% to 3.2%. During 2012 and 2013,

the growth rate for profit margin was 26.9% and 19.3%, contributing to 117% and 66%

for the growth of ROE.

Based on DuPont 5 steps analysis, interest burden increased around 20% in 2012 and

2013, which drive the most growth for the growth of ROE. As we forecast for 2014 to

2018, as total revenue grows, the asset turnover and interest burden will increase, which

contribute to the increase of ROE. However, when we consider the factor that the interest

rate will goes up in next five years, interest burden may decrease, which may cause the

slow growth for ROE.

Industry Analysis – Competing Across Industries The car rental business is generally tied to the overall health of the economy. Any

reduction in consumers’ purchasing power will negatively impact the car rental business,

as consumer gravitate towards less costly alternatives such as public transportation or

carpooling. Conversely, a strong economy will increase demand for car rentals globally,

therefore improving Hertz’s business. We cautiously optimistic about the economic

forecast, which should translate into modest gains in the car and equipment rental

industry. With respect to Hertz’s competitors, please consider the following assessments.

Price Ranges

48.0 35.4

29.0

1,000 0.81 0.83 0.84

500 0.79 0.80 0.80

250 0.78 0.79 0.79 Share buyback (in Millions)

Source: Team Estimate


11

Stock Price

(10/1/2014)

Net Income

LTM (M)

2013

EV/EBIT

2013 EV

Sales

2013 ROE

(%)

Hertz 23.7 353.5 19.53 2.67 12.49

Ashtead Group 1646 402.9 12.98 2.88 22.62

Caterpillar 97.6 3,887.9 11.05 1.12 19.76

United Rentals 104.4 660.9 13.7 2.92 22.28

Avis Budget 53.3 314.9 19.49 1.81 2.09

Amerco 259.8 342.4 7.02 1.55 23.37

Sixt SE 32.4 131.8 12.46 1.26 13.98

Positive Forecast for Car Rentals Regarding 2013 sales, Hertz has outperformed all of the car rental companies that we

have analyzed. This includes Amerco (U-Haul), Avis and Sixt. Hertz’s status as the

benchmark for car rental companies will never be in jeopardy, and as the economy

continues to recover, they should expect modest gains. While their equipment rental

business is not quite established, we are not concerned since this is not their main source

of income (in addition to the impending spin-off).

Mixed Results by Product Line

With regards to 2013 sales, Hertz is outperforming all of the car rental companies that we

have analyzed. This includes Amerco (U-Haul), Avis and Sixt. This is consistent with

Hertz’s performance with regards to net income, as they have outperformed their car

rental competitors in this key indicator. Hertz’s equipment rental business, however, has

lagged in these areas. Caterpillar and United Rentals dominate this industry, while Hertz

has struggled to establish itself.

Underwhelming Returns With regards to return on equity, we see a familiar trend. Hertz has remained on top of

the publicly traded car rental companies. In comparison to Avis, they are extremely

efficient at producing profits for every unit of equity. SIXTE, a high-end international car

rental brand barely edges out Hertz in this category. Hertz, however, is a substantially

larger company so it is somewhat impressive that their returns as a proportion of

shareholder’s equity are so similar. Again, the equipment rental companies we have

outlined have performed significantly better with regards to this key economic indicator.

Positive Anecdotes

Hertz’s share price as of October 2014 is lower than that of its competitors, despite it

being one of the preeminent car rental companies. As they expand their operations to

more airports, and are able to reduce prices as a function of offering insurance (a high

margin business), and unmanned kiosks, they will become more desirable to cost-

conscious consumers. In addition, they are currently integrating Dollar Thrifty into their

business, which will further their efforts to reach a greater market share. Price has been

identified via our market survey as the primary factor when choosing a brand – should

they be able to offer lower prices relative to competitors, they will improve their financial

standing. Since their share price is relatively low, and since we expect them to grow their

car rental business, this represents an opportunity for prospective investors. In addition,

as they spin off their equipment rental business, which will become a separate entity, they

can concentrate solely on their main source of income, car rentals.

Program %


Accident Rate

Source: WHO


12

Investment Risks

Residual risk: The percentage of “program cars” that, manufacturers agreed to

repurchase at a specified price or guarantee to depreciation rate has decreased from 48%

to 30% in Hertz car rental fleet. Additionally, the decline in the value of the non-program

cars cause severe residual risk for the company. Compared to Avis’s 37% program cars,

Hertz faces bigger challenges.

Reductions in the levels of airline passenger travel: The car rental industry is

particularly affected by reductions in business and leisure travel, especially with respect

to levels of airline passenger traffic. Reductions in levels of air travel, whether caused by

general economic conditions, airfare increases or other infrequent events such as

disasters, diseases, or work stoppages can influence both cost and revenue severely.

Further, decreases in levels of airline passenger traffic in key leisure destinations,

including Florida, Hawaii, California and Texas, also affect the company.

Fuel price fluctuation: Oil prices are down from $105.93 in June to the present price at

$52.69(Jan. 5 2015), giving Hertz a great chance to reduce its expense in fuel. However,

according to the historical data of oil price, it fluctuates a lot, so oil price can still be a

risk.

Car-Sharing Rentals Grow (Zipcar): A new model for people to go out more

conveniently with cars called car sharing are created and developed. Roughly 18 percent

of Americans have used a car-sharing service. For Hertz, it is not only a challenge but

also an opportunity because it captures parts of car rental market share, reducing revenue

of Hertz. On the other hand, Hertz can take action immediately to think of new car rental

program to compete with other competitors.

Rental Fraud, and Traffic Accidents (China): Since Hertz cooperates with the Chinese

largest car rental company, we should take the risk that car rental companies in China

face into account. Rental fraud and traffic accidents are two of the largest risks. China has

roughly one-third as many vehicles as the United States does, yet it sees about 20,000

more traffic deaths per year, causing huge insurance cost.


13

Appendix

Appendix 1: Income Statement and Free Cash Flow Buildup

Appendix 2: Valuation: Perpetuity vs Exit Multiple

Appendix 3: WACC

Appendix 4 : Sensitivity Analysis – Exit Multiple

Appendix 5: Deal Comps for Car Rental Industry

Appendix 6: DuPont Analysis

Appendix 7: U.S. Civilian Unemployment Rate

Appendix 8: U.S. Personal Consumption Expenditures

Appendix 9: European Annual GDP forecast

Appendix 10: GDP Annual Growth Rate

Appendix 11: Oil (WTI) Price

Appendix 12: Fuel cost in Airline Industry in 2013

Appendix 13: US Citizen Monthly Traveling

Appendix 14: SWOT Analysis

Appendix 15: Porter’s Five Force

Appendix 16: Accident Responsibilities between Different Types of Vehicles

Appendix 17: Car Rental Survey Results


14

Appendix 1:

Figure 1: Income Statement in millions

Income Statement Data

($ In Mn) Projected Annual Forecast

2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018P

Revenue $8,299.3 $9,024.9 $10,771.9 $11,689.3 $12,574.0 $13,645.4 $14,827.6 $16,133.4

Revenue Growth Rate (%) 8.74% 19.36% 8.52% 7.57% 8.52% 8.66% 8.81%

EBITDA $3,043.2 $3,416.5 $4,150.9 $4,137.9 $4,460.4 $4,851.2 $5,282.7 $5,759.7

EBITDA Margin (%) 36.67% 37.86% 38.53% 35.00% 35.50% 35.75% 36.00% 36.25%

EBIT 1,075.5 1,175.5 1,500.6 $1,144.9 $1,240.9 $1,357.4 $1,486.2 $1,628.8

EBIT Margin (%) 12.96% 13.03% 13.93% 9.79% 9.87% 9.95% 10.02% 10.10%

Depreciation & Amortization $1,967.6 $2,241.0 $2,650.3 $2,993.0 $3,219.5 $3,493.8 $3,796.5 $4,130.9

D&A as a % of revenue 23.71% 24.83% 24.60% 25.60% 25.60% 25.60% 25.60% 25.60%

Free Cash Flow Buildup

($ In Mn) Projected Annual Forecast

2014A 2015A 2016A 2017A 2018A

Period 1 2 3 4 5

Total Revenues $11,689.3 $12,574.0 $13,645.4 $14,827.6 $16,133.4

EBITDA 4,137.9 4,460.4 4,851.2 5,282.7 5,759.7

EBIT 1,144.9 1,240.9 1,357.4 1,486.2 1,628.8

Tax rate 35.0% 35.0% 35.0% 35.0% 35.0%

EBIAT $744.2 $806.6 $882.3 $966.0 $1,058.7

Depreciation & Amortization 2,993.0 3,219.5 3,493.8 3,796.5 4,130.9

Accounts receivable (128.8) (124.2) (150.5) (166.0) (183.4)

Inventories (13.4) (8.0) (9.7) (10.7) (11.8)

Prepaid expenses (103.8) (62.1) (75.2) (83.0) (91.7)

Accounts payable 140.1 83.9 101.6 112.1 123.8

Accrued expenses 159.8 95.7 115.9 127.8 141.2

Capital expenditures (2,571.6) (2,829.1) (3,070.2) (3,336.2) (3,630.0)

Unlevered free cash flows $1,219.5 $1,182.1 $1,288.0 $1,406.5 $1,537.7

Discount Rate (WACC) 7.6% 7.6% 7.6% 7.6% 7.6%

Present value of free cash

flows

$1,133.3 $1,020.9 $1,033.7 $1,049.1 $1,065.8


15

Appendix 2: Valuation: Perpetuity vs Exit Multiple

in millions

Prepetuity Growth Method

Exit Multiple Method at 7 times

Enterprise Value

$32,167.5 Enterprise Value

$33,248.00

Less: Net debt

16,309.4 Less: Net debt

16,309.4

Equity Value

$15,858.1 Equity Value

$16,938.6

Diluted Shares Outstanding

447.7 Diluted Shares Outstanding

447.7

Equity Value Per Share

$35.42 Equity Value Per Share

$37.83

Appendix 3: WACC

Cost of Equity via CAPM model:

Risk Free Rate:

We have taken the 5 year US treasury bond yield of 1.65% as the risk free rate plus a premium of 1% as we are of

the view of the yields increasing in the coming years. We have conducted an analysis of the yield curve after the

1929 great depression. Post the crisis there was yield increased about 1% over 5 years. Hence we provide a 1%

premium to the risk free rate of 1.65% making our risk free rate to 2.65%

Risk Premium:

S&P500 has provided a return close to 9.5% over the last ten years. Hence we have assumed a market retrun rate

of 9.5% making our risk premium at 6.85%

Beta:

We have derived our beta of 1.65 as an average of the beta of the stock in comparison with S&P 500 for the last 3

years.

Cost of Debt:

The cost of debt of the company is based on the yield of the BB rated bonds, currently at 5.03%. The post tax cost

of debt is 3.27%.

This leads to our WACC of 7.61%


16

Appendix 4 : Sensitivity Analysis – Exit Multiple

Multiple

% change in EBITDA

estimates

6 6.25 6.5 6.75 7 7.25 7.5 7.75 8

-7.5% 24.90 26.97 29.03 31.09 33.15 35.22 37.28 39.34 41.40

-5.0% 26.24 28.36 30.48 32.60 34.71 36.83 38.95 41.07 43.18

-2.5% 27.58 29.75 31.93 34.10 36.27 38.45 40.62 42.79 44.97

0.0% 28.92 31.15 33.38 35.61 37.83 40.06 42.29 44.52 46.75

2.5% 30.26 32.54 34.83 37.11 39.40 41.68 43.97 46.25 48.54

5.0% 31.59 33.93 36.27 38.61 40.96 43.30 45.64 47.98 50.32

7.5% 32.93 35.33 37.72 40.12 42.52 44.91 47.31 49.71 52.10

Appendix 5: Deal Comps for Car Rental Industry

EV/Sales EV/EBITDA EV/IBD EV/NI P/E

RSC Holding Inc 3.30x 9.30x 2.10x (179.60x) (25.42x)

Dollar Thrifty Automotive Group Inc 2.40x 5.50x 2.40x 19.60x 12.87x

Avis Europe Plc 0.70x 8.80x 1.50x 43.60x 24.48x

Zipcar Inc 2.10x 11.90x 4.60x 39.50x 33.11x

US Rentals 2.60x 5.90x 3.20x 15.00x 19.43x

Bucyrus International Inc 2.80x 16.00x 5.70x 32.00x 27.96x

Average 2.32x 9.57x 3.25x (4.98x) 15.40x

Current Price 25.00

1 Day

Premium

Acquirer Date Estimate Price Over(Under)

Valued

58.72% United Rentals Inc 12/16/2011 45.00 80.00%

8.02% Hertz Global Holdings Inc 8/26/2012 12.88 -48.47%

59.90% Avis Budget Group Inc 6/14/2011 17.92 -28.34%

48.67% Avis Budget Group Inc 1/2/2013 88.84 255.37%

NA United Rentals 6/16/1998 19.61 -21.56%

32.15% Caterpillar Inc 11/15/2010 52.22 108.88%

0.41 39.41 57.65%

Source: Factset, team estimate

Car rental industry deals

(in million) EV/Sales EV/EBITDA EV/EBIT P/E Date

RSC Holding Inc 3.30x 9.30x 27.00x (25.42x) 12/16/2011

Dollar Thrifty 2.40x 5.50x 10.20x 12.87x 8/26/2012

Avis Europe Plc 0.70x 8.80x 10.20x 24.48x 6/14/2011

Zipcar Inc 2.10x 11.90x 76.00x 33.11x 1/2/2013

US Rentals 2.60x 5.90x 13.80x 19.43x 6/16/1998

Bucyrus International Inc 2.80x 16.00x 19.50x 27.96x 11/15/2010

Average 2.32x 9.57x 26.12x 15.40x


17

Name Hertz

Cash 445.00

Sales 10,772.00

EBIT 1570.3

EBITDA 4,342.00

Net Income 346.20

EPS 0.84

Shares Outstanding 445.80

Total Long term debt 16,309.00

Total asset 24,588.00

Each deal estimate price is calculated by using valuation multiplier, including EV/Sales, EV/EBITDA, EV/EBIT,

and P/E ratio. By equally weighting all estimate price, we come up with final estimate valuation price $39.41,

which is 57.65% greater than current stock price $25.00.

Estimate Price Over(Under)

Valued

RSC Holding Inc 45.00 80.00%

Dollar Thrifty Automotive Group Inc 12.88 -48.47%

Avis Europe Plc 17.92 -28.34%

Zipcar Inc 88.84 255.37%

US Rentals 19.61 -21.56%

Bucyrus International Inc 52.22 108.88%

Average 39.41 57.65%

Sources: Factset, team estimate


18

Appendix 6: DuPont Analysis

DuPont Analysis for Hertz

2009 2010 2011 2012 2013

ROE (6.0%) (2.3%) 7.9% 9.7% 12.5%

ROA (0.8%) (0.3%) 1.0% 1.0% 1.4%

leverage factor 7.6x 8.2x 7.9x 9.3x 8.9x

Profit Margin (1.8%) (0.6%) 2.1% 2.7% 3.2%

Asset turnover 44.4% 43.6% 47.0% 38.7% 43.8%

DuPont 5 steps Analysis for Hertz

2009 2010 2011 2012 2013

ROE (6.0%) (2.3%) 7.9% 9.7% 12.5%

leverage Factor 7.6x 8.2x 7.9x 9.3x 8.9x

Asset Turnover 44.4% 43.6% 47.0% 38.7% 43.8%

Tax Burden 53.5% 332.7% 45.5% 50.0% 45.1%

Interest Burden (52.9%) (2.0%) 35.8% 43.0% 52.2%

Operation Margin 6.3% 9.9% 13.0% 12.5% 13.7%

DuPont 5 steps Analysis for Hertz Projected Year

2014 2015 2016 2017 2018

ROE 6.5% 7.6% 9.0% 10.0% 10.9%

leverage Factor 8.5x 7.7x 7.3x 6.7x 6.2x

Asset Turnover 47.8% 50.8% 54.0% 57.2% 60.1%

Tax Burden 65.0% 65.0% 65.0% 65.0% 65.0%

Interest Burden 27.8% 33.5% 39.3% 44.7% 49.7%

Operation Margin 8.8% 8.9% 8.9% 9.0% 9.1%


19

Appendix 7: U.S. Civilian Unemployment Rate

Source: US. Bureau of Labor Statistics

Appendix 8: U.S. Personal Consumption Expenditures

Source: US. Bureau of Economic Analysis

0.0

2.0

4.0

6.0

8.0

10.0

12.0

200

0-0

1-0

1

200

0-0

7-0

1

200

1-0

1-0

1

200

1-0

7-0

1

200

2-0

1-0

1

200

2-0

7-0

1

200

3-0

1-0

1

200

3-0

7-0

1

200

4-0

1-0

1

200

4-0

7-0

1

200

5-0

1-0

1

200

5-0

7-0

1

200

6-0

1-0

1

200

6-0

7-0

1

200

7-0

1-0

1

200

7-0

7-0

1

200

8-0

1-0

1

200

8-0

7-0

1

200

9-0

1-0

1

200

9-0

7-0

1

201

0-0

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201

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1

201

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201

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1

201

2-0

1-0

1

201

2-0

7-0

1

201

3-0

1-0

1

201

3-0

7-0

1

201

4-0

1-0

1

201

4-0

7-0

1

Civilian Unemployment Rate

8000.0

8500.0

9000.0

9500.0

10000.0

10500.0

11000.0

11500.0

12000.0

12500.0

200

7-0

1-0

1

200

7-0

5-0

1

200

7-0

9-0

1

200

8-0

1-0

1

200

8-0

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200

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1

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1-0

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4-0

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1


20

Appendix 9: European Annual GDP forecast

Source: European Commission

Appendix 10: GDP Annual Growth Rate

2010 2011 2012 2013 2014e 2015e

United States 2.5% 1.6% 2.3% 2.2% 2.3% 2.6%

United Kingdom 1.9% 1.6% 0.7% 1.7% 2.5% 2.8%

Germany 4.1% 3.6% 0.4% 0.1% 1.6% 1.1%

France 2.0% 2.1% 0.3% 0.3% 0.4% 0.1%

Italy 1.7% 0.6% -2.3% -1.9% -0.4% -0.1%

Spain 0.0% -0.6% -2.1% -1.2% 1.3% 2.2%

China 10.4% 9.3% 7.7% 7.7% 7.4% 7.2%

Japan 4.7% -0.5% 1.8% 1.6% 0.1% -1.1%

Australia 1.9% 3.1% 0.9% 0.2% 0.2% 0.1%

South Korea 6.5% 3.7% 2.3% 3.0% 3.4% 3.3%

Source: The World Bank, team estimate


21

Appendix 11: Oil (WTI) Price

Source: St. Louis Fed

Appendix 12: Fuel cost in Airline Industry in 2013

Company name (in millions) Fuel

cost

Operating

cost

Percentage

JetBlue Airways Corporation (JBLU) 1,899 5,013 37.9%

American Airlines Group Inc. (AAL) 7,839 25,344 30.9%

Southwest Airlines Co. (LUV) 5,763 16,421 35.1%

United Continental Holdings, Inc. (UAL) 12,345 37,030 33.3%

Delta Air Lines, Inc. (DAL) 9,397 34,373 27.3%

Average 7,449 23,636 31.5%

Source: Annual reports

Appendix 13: US Citizen Monthly Traveling

Source: National Travel and Tourism Office

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Oil (WTI) Price

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

US Citizen Monthly Traveling


22

Appendix 14:

SWOT ANALYSIS

Strengths

Hertz captures 25% market share of the car rental business, an impressive figure for a high-end brand.

Hertz has developed a 24/7 unmanned service available via kiosks and online allowing customers to rent cars hassle-

free. This technological advance is expected to increase their capacities for high volume and improve customer

service, factors that will positively impact their non-airport market share.

The Company has strong partnerships with numerous companies in different industries such as airlines, railways,

hotels and travel

This advance will also decrease costs and enable Hertz to offer more competitive prices

Hertz’s car sales business is shifting away from auction in favor of selling directly to dealers and retail. The per-car

benefit of this shift is about $500-1000.

Hertz has managed to decrease fleet depreciation substantially since 2006

Hertz’s equipment rental business is substantial, as they are the third largest competitor.

Hertz has outstanding brandawareness.

Weakness

Accounting issues has put Hertz behind in its financial reporting by two quarters as of October 2014. This will

undoubtedly scare investors if they fail to address the issue in the coming months.

Hertz’s on-airport facilities have reported being over-fleeted in 2013 due to lower-than-expected airline volumes.

Hertz is second to Enterprise in the market share despite its impressive degree of brand awareness.

Hertz’s business operations heavily funded by debt rather than equity which may hinder the company from borrow

and repay money. The company has a debt/equity ratio of 5.89

Opportunities

Hertz recently has invested in its insurance business, a major source of revenue for Enterprise, the current market

leader.

Hertz reaching out to grab the lower-end of the market by acquiring Dollar Thrifty. The move will deliver a revenue

synergy of $300 million.

Hertz has expended their brand extensively within the car rental business, by offering more diverse product lines

than previously available.

They have 10 registered and 16 pending patents, which represents opportunities for technological growth.

With respect to the equipment rental industry, companies are gravitating towards renting rather than purchasing

products.

Anticipated spin-off of the equipment rental business demonstrates their high expectations in this realm.

The economy’s impending rebound will improve their share price.

The growth of the Chinese market and IPO of China Car Rental.

Threats

Their residuals are very sensitive; as a 1% change to residuals could result in a pretax profit/loss of $83 million.

The amount and level of competition is increasingly aggressive.

Global travel is also sensitive to the threat of terrorism posed by ISIS.


23

Appendix 15:

PORTER’S Five Forces

THREAT OF

NEW

ENTRANTS

POWER OF

SUPPLIERS

POWER OF

BUYERS

THREAT OF

SUBSTITUTES

RIVALRY

Low Low High Moderate High

High capital and

investment costs

High number of

suppliers in the

industry

Low switching costs Various substitute

services: Uber,

ZipCar, Lyft, Yellow

Cab,…

Numerous

competitors

Innovative entry

with unconventional

services

Supplier’s products

are important inputs

but has low

switching costs

High bargaining

power due to low

switching cost and

variety of

competitors

Threats of substitutes

depends on the travel

purpose and distance

of customers

Strong price

competition

Demand curve is

very elastic and

heavily based on

pricing strategy

Low bargaining

power

With internet, buyers

are now able to

compare price and

make decision

Moderate industry

growth (depend on

the economy)

Economies of scale

create advantage

High price sensitive

and moderate

experience sensitive

High exit barriers

Easy to imitate

product

differentiation

Customer loyalty

varies upon type of

customers

Appendix 16: Accident Responsibilities between Different Types of Vehicles

Drivers/Road Users Vehicles Total

Trucks 22.2% 6.4% 28.6%

Coaches/Buses 7.0% 1.8% 8.8%

Cars 20.4% 3.1% 23.5%

Motorcycles 19.7% 2.3% 22.0%

Other Motorized Vehicles 9.0% 2.9% 11.9%

NMV/Pedestrians 5.1% 0.0% 5.1%

Total 83.4% 16.5% 99.9%

Source: China Road Traffic Safety - World Bank


24

Appendix 17: Car Rental Survey Results

The results of our survey undoubtedly support our ‘buy’ recommendation. Consumers have certain expectations

when participating in a rental transaction. They are not overwhelmingly emotional with regards to any brand, but

gravitate towards what they know and trust.

Three major brands dominate the market, according to our survey, as consumers are weary of lesser popular

companies. Only 13% did business with companies other than Hertz, Avis or Enterprise. In addition, Hertz has

received an impressive 40% of the market share. This is promising.

Purpose Hertz has affiliated its company most commonly with travel. 68% of those surveyed have rented a car from Hertz

via an Airport facility. Hertz intends on growing their presence at airports, which given this statistic, will improve

their business.

Of those surveyed who have used Hertz, most have done so for Leisurely purposes. They are vacationing and are

in need of private transportation. This supports Hertz’s objective of obtaining business from vacationers. Coupled

with their intentions of increasing their airport presence, we are very optimistic.

Hertz, 38.46%

Avis, 27.69%

Enterprise,

26.15%

Other, 13.85%

0.00%

50.00%

100.00%

Business Leisure Local Commute Other

Rental Care Purpose


25

Customer Satisfaction Our survey indicated that most consumers are not loyal to a particular brand – they want a reliable and safe

service that does not interrupt precious vacation time. Consumers do not react very emotionally (unless negative)

in favor of a certain brand.

It is no surprise that only 12% of those surveyed consider Hertz’s service to be ‘Excellent’. It is difficult to

quantify a service as excellent when it is as unexciting as renting a car. The heart of the matter lies in those who

are satisfied. According to those surveyed 67% were satisfied – a notable figure when considering how unpleasant

overall travel experiences can be. We are impressed by their ability to consistently deliver a familiar product to

satisfied consumers.

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company.

The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or

publication of this report. [The conflict of interest is…]

Receipt of compensation:

Compensation of the author(s) of this report is NIL

Market making:

The author(s) does [not] act as a market maker in the subject company’s securities.

Ratings guide:

Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater

over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.

A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Investment Research Challenge and Global Investment Research Challenge Acknowledgement:

Fordham Univestity Investment Research Challenge as part of is based on the Investment Research Challenge originally developed by Fordham University.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but

the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a

solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Fordham

University Challenge with regard to this company’s stock.

Excellent

12%

Satisfactory

67%

Poor

4%

Other

17%

Hertz Customer Satisfaction

Documents

HERTZ-Group5-FinalReport