Disappointing Hertz results viewed through Cyber-Financial (CyFi) lens

Summary

Hertz (HTZ) announced Q419 and FY19 results on February 24, reporting quarterly sales of $2.326 billion, which missed the analyst consensus estimate of $2.34 billion. The company ended the fourth quarter with cash and cash equivalents of $865 million, compared to $1.13 billion at the end of 2018. Total debt as of year-end amounted to $17.09 billion, compared to $16.32 billion as of Dec 31, 2018.

As of February 25, the stock was down approximately 15 percent post-earnings.

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Analysis

According to a January 17 Cyberhedge Alert on HTZ, as a 1-star-rated company in cyber governance, key financial constraints (low EBIT/Interest Expense, limited profit, and FCF growth vs. peers) limit HTZ’s ability to fix its underlying cyber weaknesses. Cyberhedge concluded that this would create an increased risk for investors over the following 12-18 months. Modest growth expected in 2020 coupled with limited FCF growth (further evidenced by year-end results) constrain HTZ management’s ability to allocate more resources to improving network security. Meanwhile, competitive pressure to digitally transform continues to increase.

Overall, weak 4Q19 financials mean that HTZ continues to face a difficult choice of investing in growth and cost savings, while also making necessary investments in cybersecurity to protect that growth. This is a challenging set of choices all companies have to navigate, but HTZ’s financial constraints and the added pressure of underwhelming results heading into year four of a turnaround effort make these choices even more difficult.

HTZ’s future prospects and brand value (as transportation becomes technology) is as dependent on how well it manages its cyber risk as it is on hitting successful growth, productivity, and cost-reduction targets of digital transformation. In its most recent 10-K, HTZ articulated the goals and what is at stake: “The information technology transformation is intended to increase the customer experience and ultimately drive efficiencies, service offerings and future productivity.”

As stated in the January Cyberhedge Alert, the effective management of technology is existential to the future of HTZ’s business, and the company is currently managing technology risks poorly. Downward pressure on the share price is only going to make this task more challenging over the balance of 2020. Cyberhedge will continue to monitor the company’s cyber governance performance and star rating as an indication of whether steps are being taken to address the underlying weaknesses.

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Denis Bolshakov

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