Overview: Glenview Capital Management's 1Q14 positions

Part 3
Overview: Glenview Capital Management's 1Q14 positions (Part 3 of 6)

Why Glenview Capital adds position in Hertz Global Holdings

Glenview Capital adds position in Hertz Global Holdings

Larry Robbins’ Glenview Capital added new positions in WellPoint Inc. (WLP), Hertz Global Holdings Inc. (HTZ), eBay Inc. (EBAY), and Applied Materials Inc. (AMAT). The largest position sold was Xerox (XRX).

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Glenview Capital started a new position in Hertz Global Holdings (HTZ) that accounts for 2.31% of the fund’s portfolio.

Hertz operates its car rental business through the Hertz, Dollar Thrifty, and Firefly brands from approximately 11,555 corporate and franchisee locations in North America, Europe, Latin and South America, Asia, Australia, Africa, the Middle East, and New Zealand. Its annual filing said revenues have grown at a compound annual growth rate of 6.9% over the last 20 years, with year-over-year (or YoY) growth in 17 of those 20 years.

Why did Hertz’s shares fall recently?

Shares plunged recently on certain accounting related issues due to which the company delayed its 1Q14 results announcement, which was scheduled on June 9. A regulatory filing noted that, “During the preparation of the First Quarter 10-Q, errors were identified relating to Hertz’s conclusions regarding the capitalization and timing of depreciation for certain non-fleet assets, allowances for doubtful accounts in Brazil, as well as other items. Hertz continued its review and recently identified additional errors related to allowances for uncollectible amounts with respect to renter obligations for damaged vehicles and restoration obligations at the end of facility leases.”

The filing added that, “the financial statements for 2011 should no longer be relied upon, and Hertz must restate them. Hertz also needs to correct the 2012 and 2013 financial statements to reflect these errors.” The company had also delayed filing its annual report in March saying that due to a “recent implementation of an enterprise resource planning (ERP) system, the company encountered significant issues during the preparation of its annual financial statements which impacted its resources and overall system of financial reporting.”

Spinoff of equipment rental business “on track”

Hertz said earlier this year that its board approved the separation of its equipment rental business. The release said the board has approved plans to separate into two independent publicly traded companies. The two companies will be “Hertz,” comprised of the Hertz, Dollar Thrifty, and Firefly rental car businesses, as well as Donlen, a provider of fleet leasing and management services, and the Hertz Equipment Rental Corporation (or HERC). The separation is planned to be in the form of a tax-free spinoff to Hertz shareholders. Hertz recently said in its regulatory filing that, “While it is possible that the efforts to resolve the various accounting issues could impact the timing of the actual separation, plans to separate the equipment rental business remain on track. ”

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Hertz’s 1Q results to be below consensus

The car rental company expects 1Q results to be “likely to be below consensus, reflecting costs associated with the accounting review, other unusual items, and certain anticipated operating results.”

In terms of preliminary operating highlights, U.S. rental car revenue increased approximately 4.5%, but total revenue per day was down 1.6% compared with last year “due to excess fleet creating a supply and demand imbalance, the loss of the Easter holiday, and a strategic change in the business mix with the introduction of the Firefly discount brand on airport and significant, rapid growth in insurance replacement business.” Hertz added that the actions taken to right size the fleet in the first quarter coupled with deliveries of new, lower-cost program cars in the second quarter, are expected to drive sequential improvement in fleet costs in the first half of 2014.

International rental car revenue increased approximately 1.7% over the same period last year. The company expects to “continue to make progress in the second quarter as the European and Asia Pacific macro environment improves.” Worldwide equipment rental segment revenue increased approximately 2.4% over the same period last year. Donlen leasing operation’s revenue growth outperformed market competitors.

The car rental space saw consolidation last year with Hertz Global buying Dollar Thrifty while rival Avis Budget Group (CAR) acquired Zipcar and Payless Car Rental. Shares of these companies have rallied as an improving U.S. economy  boosted leisure and business travel.

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