Login Register Subscribe
Current Issue

Car rental firm Hertz is latest victim of auto recalls


(Reuters) — While an improving U.S. economy has helped rev up demand for car rentals, the rental companies have found themselves short of vehicles due to the slew of recalls by car manufacturers this year.

The latest casualty was Hertz Global Holdings Inc., whose stock slumped as much as 13% on Wednesday after the company withdrew its full-year financial forecast, blaming a shortage of cars due to the recalls and costs associated with an accounting error.

Activist investor Carl Icahn on Wednesday reported an 8.48% stake in Hertz and said he intended to engage in talks with management on accounting issues and operational failures.

Mr. Icahn said in a regulatory filing that he would also discuss the company's underperformance and lack of confidence in management with Hertz.

Hertz said in a statement that it valued the views of all its shareholders and welcomed “a constructive dialog” with them.

Hertz shares pared losses after the Icahn stake was disclosed, and closed down 3.9% at $30.33.

Hertz, Avis Budget Group Inc. and market leader Enterprise Rent-A-Car control about 90% of the U.S. car rental market.

“They (Hertz) weren't able to get the benefit of a strengthening market because they simply didn't have the cars,” Michael Millman of Millman Research Associates told Reuters.

Mr. Millman said that for Hertz the shortage was compounded because the company has a lot of contracted business that gets priority on available cars.

The recalls have hurt Hertz more than Avis, because cars made by General Motors Co. account for a bigger portion of its fleet.

GM cars comprise nearly 28% of Hertz's U.S. fleet, compared with 19% for Avis. GM, the No. 1 U.S. automaker, has recalled millions of cars this year, most notably for a deadly ignition-switch flaw.

Companies including Ford Motor Co. and Honda Motor Co. have also recalled vehicles in the United States this year.

Avis had nearly 125,000 cars, or about one-third of its fleet, recalled until July 31 and has said costs associated with the recalls were expected to affect current-quarter results.

“Some cars have been grounded for literally months because of an inability to get parts,” Avis CEO Ron Nelson said in a post-earnings conference call earlier this month.

Hertz on Tuesday said it expects 2014 results to be “well below” its previous forecast due to the recalls and costs related to correcting financial results to fix accounting errors originating in 2011.

A Hertz investor said Mr. Icahn's move was good news for the company. The investor, who declined to be named, citing company policy, said CEO Mark Frissora had done a poor job managing the company.

“Most holders will share this view,” the investor said. “This guy is going to go, he's gone.”

J.P. Morgan Securities cut its rating on Hertz's stock to “neutral” from “overweight” and its target price by $7 to $25. Deutsche Bank downgraded the stock to “hold” from “buy.”