Let’s just say it’s not looking good for car rental firm Hertz (HTZ). According to Morgan Stanley analyst Adam Jonas, hopes of a turnaround are, well, pretty close to zero.
The analyst’s best-case scenario for Robinhood’s favorite bankrupt stock is a $3 price target (down from $8). The base case, however, is $0 (down from $2). This begs the question: what is the bear case?
Jonas argues that even if lenders are willing to help Hertz out with a financial package, there are “concerns of material equity dilution.”
Jonas explained, “As equity holders are at the bottom of the pecking order of the capital structure with over $18.8 billion of debt outstanding, (and up to $24 billion in total debt outstanding according to Hertz bankruptcy filing), we believe it is more likely than not, that equity will not carry a meaningful residual value as secured creditors will have first claim to cash or assets in the waterfall. Ultimately, given the binary nature of scenarios, our new base case reflects our view that our bear case has a higher probability of occurring than our bull case.”
The wafer-thin chance that Jonas’ bull case scenario will play out rests on the possibility Hertz can secure financing. Even so, while a financial package would provide liquidity and enable Hertz to continue operating, the company will still need to work with creditors on satisfying its piles of debt, with it possibly reemerging as virtually a new company. This will result in current shareholders owning a completely worthless stock.
Further hammering home the case for why Hertz is most likely heading to $0 is the very real possibility of a delisting from the New York Stock Exchange. Hertz has already received notice it will be delisted, a decision it has appealed. Given the way things stand, Jonas recommends a “wait and see approach,” as the risks remain firmly “skewed to the downside.”
Accordingly, Jonas has removed his rating for Hertz. (To watch Jonas’ track record, click here)
The view from the rest of the Street is hardly any rosier. Based on 4 Sells and 3 Holds, Hertz has a Moderate Sell consensus rating. Yet, for those ready to take a punt, there’s potential upside of 68%, should the $2.84 average price target be met over the next year. (See Hertz stock-price forecast on TipRanks)
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