Hertz Global Holdings, Inc. (HTZWW)

Hertz rents cars. That is not a metaphor or a simplified version of what it does — it is what it does. You walk into an airport terminal, Hertz is there. You need a car for a week, you pay Hertz a daily rate, you drive it, you bring it back. The company owns thousands of vehicles, maintains them, insures them, and sells them when they are used up. It is perhaps the most straightforward business model in the world: buy a fleet, rent it out, replace it regularly. The money comes from day-to-day rental revenue. The cost is everything else: the actual purchase price of the cars, the maintenance, the insurance, the staff, the lot rental, the fuel, and the wear and tear.

That simplicity is deceptive. Car rental is brutal because the margins are thin, the competition is fierce, and the value of the fleet itself is always moving. A sudden collapse in used-car prices can evaporate months of profits. A surge in insurance costs can kill margins overnight. The business is also hideously capital-intensive and cyclical — it does well when economies boom and business travel is brisk, and it suffers when people stop moving.

How the money flows

Hertz books revenue whenever a customer rents a car. The rate depends on the market, the season, and the car type. In good times, Hertz can charge what the market will bear. In a recession, rental rates plummet as demand evaporates and competitors slash prices to keep volume. The company also sells insurance, GPS upgrades, and late-return fees. These ancillary revenues are important because they carry higher margins than the pure rental. But they cannot save the business if the core rental market is weak.

The other side of the equation is the fleet itself. When Hertz buys a new car, it appears on the balance sheet as an asset. The company is betting that it can rent that car out enough times to recoup its cost, plus all the maintenance and insurance, plus earn a profit. If a car costs $30,000 and Hertz keeps it for three years and rents it aggressively, it might generate $50,000 in gross revenue from rental. But the actual profit depends on how much that car is worth when Hertz sells it at the end. If used-car values are strong, Hertz can recover a large portion of the purchase price and lock in a decent profit. If used-car prices have fallen, the residual value is lower, and the profit margin shrinks.

This is called the depreciation risk, and it is the single biggest economic wildcard in car rental. During years when used-car values are stable or rising, Hertz makes real money. When used-car values crater — as they did briefly during the pandemic, and as happened in 2022 when supply-chain constraints artificially inflated vehicle values — Hertz can swing from profit to loss on the same volume of rentals. The company tries to minimize this risk by selling cars frequently rather than holding them for years, and by trying to predict used-car prices when it buys new inventory. But prediction is not the same as control.

The capital treadmill

Hertz is trapped on a capital treadmill. To rent cars, you need a fleet. To maintain the fleet, you need to constantly replace aging vehicles. A typical car in a rental fleet might be kept for three years and 40,000 to 50,000 miles. After that, the economics of maintenance say it should be sold. So Hertz is in a perpetual cycle: buy new cars, rent them for three years, sell them, buy more cars. The new cars have to be financed somehow. Hertz has historically bought vehicles with debt — borrowing against the fleet as collateral. This gives the company leverage and allows it to run the fleet without tying up as much cash. But it also means Hertz has a large debt load that must be serviced, and the company is vulnerable to any disruption in used-car values because the collateral supporting the debt can evaporate.

This business model also means that how Hertz accounts for fleet purchases matters hugely to reported earnings. Some of the cost of buying and running cars shows up as depreciation on the income statement. Some is a cash outflow that does not flow through the profit and loss. Investors studying Hertz need to dig into the depreciation assumptions — if management is assuming cars retain X% of their value, and the used-car market says they actually retain less, then reported profits are overstated.

Competition and scale

The car-rental industry has three big players: Hertz, Enterprise, and Avis Budget. The three of them together dominate the market, especially at airports. There are regional players and the occasional independent, but the network effects matter — companies want to book rentals in multiple cities at once, so they go to the big players. Enterprise and Avis are the private and quasi-private competitors, respectively. Hertz is the public one, which is why it has to report its economics to the world.

Scale matters in car rental, but not as much as in some other industries. Hertz cannot achieve monopoly pricing by virtue of being huge. If a customer thinks the price is too high, they will book with Avis or Enterprise. The competitive advantage comes partly from brand recognition and partly from operations and efficiency — maintaining a fleet well, managing it profitably, and selling used cars at the right time for the right price. Hertz has not always excelled at these operational things, which is one reason it has struggled at times.

A history of distress and restructuring

Hertz was founded in the 1910s and was acquired in the 1980s by Ford and later by Carlyle Group and Clayton Dubilier. For decades it was a stable, mature business. Then it encountered a series of shocks. In 2020, the COVID-19 pandemic crushed travel and rental demand. Hertz filed for bankruptcy. It emerged, but with a weaker balance sheet and higher debt, and in a market where used-car values were so high that the company could hardly fill its rental fleet profitably. In 2022 and 2023, as used-car values normalized and travel recovered, Hertz staged a partial comeback. But the company entered those years with bruised credit and investors skeptical of its staying power.

The underlying problem was that Hertz could not quite get its cost structure low enough or its pricing high enough to generate enough cash flow to safely service its debt and fund growth. It was always close, but never quite there — which meant any disruption (pandemic, war, recession, used-car price swing) could push it into distress. That structural vulnerability is what makes Hertz worth understanding. It is a business with simple mechanics but relentless headwinds.

How to research Hertz

Start with the quarterly earnings reports and the annual 10-K. Look for the fleet statistics: how many cars does Hertz own, what is the average age, and what price is Hertz realizing when it sells the used cars? Compare the realized sale price to what Hertz is assuming for depreciation in its accounting — if there is a gap, earnings are being propped up artificially. Watch the rental rate trends and the utilization rate (what percentage of the fleet is rented on a given day). Strong utilization rates and stable or rising rates suggest health. Declining rates signal weakness. Also track the composition of rentals — are they airport (higher-margin, higher-pressure) or off-airport (lower-margin, steadier)? And do not ignore the debt covenants and refinancing calendar. A company with a large maturity wall coming due is under tremendous pressure to generate cash, and that can distort behavior.

The key metric is free cash flow — cash left over after buying new cars and maintaining the fleet. If Hertz is burning cash, it is living on borrowings and degrading its financial flexibility. If it is generating strong free cash flow, it is building a buffer and can invest in the business or pay down debt.