July 6, 2014 in City

Hertz may give shareholders rewarding ride

Universal Uclick
 

If you have a parking spot to fill in your long-term portfolio, consider Hertz Global Holdings (NYSE: HTZ). Accounting problems have pressured the stock and may potentially delay the spinoff of its equipment business, but there’s a lot to like in Hertz.

Hertz will be restating its past three years of financial reports. That’s not great news, but it could be worse. First off, the restatement is focusing on expenses, not aggressive revenue recognition policies or anything that suggests dramatic wrongdoing. Revenue growth, which is critical, will not change.

With the car-rental industry consolidating in recent years, having fewer competitors can prop up prices and profit margins for Hertz. (Hertz has participated in the consolidation, buying Dollar Thrifty last year for $2.3 billion.) Of course, business landscapes change over time. It remains to be seen whether new ride-sharing businesses such as Uber and Lyft turn into threats for car-rental companies such as Hertz.

Hertz plans to complete the spinoff of its equipment-rental business sometime next year. The move will give the company net proceeds of $2.5 billion, which will be used to pay down debt and reward shareholders via share buybacks (which reduce share count and thereby boost earnings per share). With a forward P/E ratio near 12, Hertz is worth a closer look. (The Motley Fool owns shares of Hertz.)

Ask the Fool

Q: How can I become a millionaire in my lifetime? – P.J., Muskegon, Michigan

A: You might want to start soon. You can earn a million dollars if you sock $5,000 per year into the stock market and earn its historic average annual return of roughly 10 percent over 31 years. You’ll get there in 25 years if you invest $10,000 per year. No return is guaranteed in the stock market, but if you invest well and for a long time, you can build great wealth.

My dumbest investment

My dumbest investment was not buying Apple. I considered doing so when the stock was at $93, but I thought that was too high. – Tony, online

The Fool responds: Ouch. You’re probably painfully aware that Apple stock has recently been trading near $90 per share – and that’s after a 7-for-1 stock split. The split-adjusted price you were considering it at is about $13, so you missed a gain of almost 600 percent. If you weren’t confident in the company’s future, though, you were right not to buy.

Remember that any stock’s price alone doesn’t tell you much. A $400 stock can be a bargain, and a stock that has recently tripled might still keep growing. You need to consider how rapidly its revenue and earnings (and, ideally, profit margins) are growing, what its growth prospects are, and how attractive its price is relative to various measures – such as earnings, via the price-to-earnings ratio.

(The Motley Fool owns and has recommended Apple shares.)

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