Editor’s note: Seeking Alpha is proud to welcome David C. Ferguson as a new contributor. It’s easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »

I give Hertz Global Holdings, Inc. (NASDAQ:HTZ) a Strong Sell rating due to their expensive price-to-earnings ratio and high debt despite the tremendous demand for rental cars.

Hertz Global Holdings, Inc. is an iconic rental car company that has rented cars for over 90 years. In addition to renting out cars themselves, Hertz owns Dollar Rent A Car and Thrifty Car Rental – two well-known companies that operate in the United States. I like to begin every stock analysis article by looking through the fundamentals of the aforementioned stock, before looking at past and future factors that affect my decision. I have therefore made a close examination of Hertz’s cash flow and fundamentals.

Fundamentals: Tremendous Debt, Problematic PE Ratio, High Profits

Hertz had a stellar Q1 of 2022, reporting an improvement in revenue and net income from Q1 of 2021. All these numbers are from SEC filings.

I note in particular that Hertz’s profit doubled and that their revenue increased by 40% when compared to the quarter from the previous year. I also especially love Hertz’s 23.54% profit margin.

The $12 billion in debt that Hertz possesses is highly concerning to me. It means that Hertz owes $44 million per quarter in interest alone.

Hertz’s current stock information is as follows:

• A price of $19.72 per share.
• A 52-week low of $14.15 and a 52-week high of $46.00.
• An earnings per share (EPS) of $0.26.
• A price to earnings (PE) Ratio of 76.41, as calculated by TTM GAAP.
• A market cap of $8.125 billion.
• An average of 5,458,836 shares traded per day.

What I mainly notice from this data is the fact that Hertz’s PE ratio is absolutely atrocious. Avis Budget Group (CAR), a company that provides similar services to Hertz, has a PE ratio of just 5.41.

In short, we know that Hertz had an excellent Q1, has a less-than-desirable PE ratio, and has a lot of debt. What should be made of this information? I will analyze past and future factors to find out.

The Past: Bankruptcy, Selling of Vehicles, and Rising from the Ashes

Hertz stock was highly valuable for several years, reaching over $150 per share in 2014. Just six years later, they were in bankruptcy court – felled by $18 billion of debt, the drop in demand for rental cars due to COVID-19, and the fall in price of used cars. Hertz was unable to get any government funding and suffered the double indignities of Chapter 11 bankruptcy and having its stock fall to a low of 40 cents per share.

To get out of bankruptcy, Hertz sold two hundred thousand vehicles – nearly one-third of its vehicle fleet. Although most companies in bankruptcy never reappear on the stock market, there was a bidding war for Hertz. Knighthead Capital and Certares Management provided Hertz with $5.9 billion in capital in return for two seats each on Hertz’s board of directors. Hertz was also able to successfully erase $5 billion in debt.

Hertz didn’t fritter their new-found cash (or at least most of it) away on donuts – they put it to use. Here is a shortlist of the improvements that Hertz made in an attempt to avoid another bankruptcy:

• Decided to increase the amount of electric and alternative-fuel cars in their fleet. They ordered 100,000 Teslas in October of 2021 and recently announced that they intend to add 65,000 Polestar EVs to their fleet within the next five years.
• Sold their Donlen fleet to Athene Holding Ltd. for $891 million in cash.
• Exited or renegotiated “a number of unprofitable contracts” which were “almost all of our [corporate] contracts” according to interim CEO Mark Fields.

Fortunately for Hertz, rental car demand increased tremendously as the pandemic waned. Hertz reported $7.336 billion in revenue in 2021 and turned a tidy profit for its shareholders.

In the last two years, Hertz has gone from bankruptcy to making $426 million in net income per quarter. They have truly “risen from the ashes,” as the statement goes. But how does that bode for their future?

The Future: Will Good Conditions Last?

Conditions are great for rental car companies at the moment – supply is low and demand is high. This means that rental car companies are fielding smaller fleets (57% smaller than 2019, according to this article) yet attaining 11% more revenue per car compared to 2019. In short, the companies have half their former inventory but are making more money per car.

The low supply and high demand are also resulting in high prices for rental cars. As this chart shows, rental car prices are much higher than they were before 2020 – resulting in a situation that is obviously beneficial for Hertz.

Unfortunately for Hertz, this situation won’t last forever – supply and demand will eventually match each other. The fact that Hertz’s PE is sitting at 76 despite the high price of rental cars is very concerning to me.

I am also very concerned about Hertz’s high debt levels. Before the pandemic, Hertz had nearly $19 billion in debt and only $1 billion in cash. At the moment they have $12 billion in debt and $1.5 billion in cash – very similar numbers to their pre-pandemic levels. If another catastrophe hits, would Hertz be able to survive?

Peer Comparison: Hertz is Highly Overvalued vs. Avis

Before delving into the risks of selling, holding, or buying a stock and making some final commentary to sum up the article, I like to compare the stock with other companies. I believe that Avis Budget Group is a particularly good comparison for Hertz – both companies have high amounts of debt, are listed on the New York Stock Exchange, and have similar financial statements, as shown below.

On the surface, Hertz and Avis look like very similar companies – Avis has more debt but also more revenue, whereas Hertz makes a higher profit margin. But the similarities end when it comes to the price of their stock. While Avis is currently trading at 5.77 times earnings, Hertz is trading at 76.41 times earnings – a number 13 times higher than Avis’s!

This bar chart provides a good visual demonstration of this phenomenon:

Simply put – if you’re looking to invest in rental cars, you can find much better value elsewhere.

Risks: Prosperity, Poverty, and Catastrophe

No good stock analysis article would be complete without a discussion of risks. I have therefore compiled a few bullet points as to some risks that can occur with regards to this stock.

If you sell this stock, you run the risk of losing out on potential gains. While I believe such gains will be minor due to the excellent conditions of the rental car market at the moment (as well as Hertz’s overvalued character), there is definitely a chance that this stock could potentially rise a few more dollars. If the rental car market continues to be amazing and produce high profits, this could potentially result in the stock remaining steady or even rising over the next few years.

If you buy or hold this stock, you risk losing large amounts of your money. Given that Hertz is trading at 76 times earnings even during excellent market conditions, what would happen to their stock if and when the rental car market returns to normal?

I also believe that Hertz could go bankrupt again should another catastrophe hit, due to their high debt levels and low amounts of cash. Although this seems unlikely, it is certainly something that should be considered.

I should also mention that gas prices are continuing to rise (according to JP Morgan, they could hit $6.20 per gallon by August). This will undoubtedly affect the demand for rental cars (people who have to spend more money on gas are less likely to take trips). While this may not destroy Hertz’s profit margin, it is definitely a risk to consider.

Final Comments: Valuation Specifics

Before giving my closing verdict, and in the interests of full transparency, I like to give a short summary of my valuation process.

To properly value Hertz, I went through their finances and fundamentals carefully. I also compared them to the other rental car company on the New York Stock Exchange, Avis Budget Group, Inc. Throughout my research, I was always shocked by Hertz’s price-to-earnings ratio and their high levels of debt.

With regards to the fundamentals and finances, it was very clear that Hertz’s cash flow and market growth are not worth a price-to-earnings ratio of 76. That ratio (and the current price) could only be justified if it were likely that Hertz would continue to rise in price – which is unlikely, as I have shown in this article. Hertz’s stock price and profits rose during an excellent time for rental car companies, which is a bad sign for future growth. Although Hertz has less debt and more cash than Avis, they do not have 13 times less value. I would personally target a price of around $4.00 per share for Hertz – this would bring its PE ratio down to a much more reasonable (though still excessive) 15.50. Given that Hertz has 49% fewer total liabilities than Avis, this seems like a reasonable price for the stock.

I will also note that this prediction is in line with Zacks Investment Research’s Quarterly Earnings Forecast for Hertz. They have the following predictions, which would place Hertz’s PE ratio in line with my predicted stock price:

In light of the above, I give Hertz a Strong Sell rating because they are clearly overvalued. It is possible to purchase the stock of a company with similar fundamentals, but with 13 times the earnings per share. I’m also highly concerned about Hertz’s ability to weather another catastrophe without going bankrupt – and their ability to make a profit in unfavorable market conditions.

Closing Verdict: Liquidate Investment and Look Elsewhere

I do not believe that Hertz has fully solved their problems that resulted in bankruptcy – they still have a high level of debt. In addition, I also believe that their high PE ratio of 76 – despite extremely favorable market conditions – is worthy of a Strong Sell rating.

Hertz is a highly overvalued debt-ridden company that, just two years ago, was bankrupt. Although they have solved some of the issues that placed them in bankruptcy court, they have not solved their debt problem. I see little reason to believe that they will do well in an economic downturn. In the end, this stock is simply too expensive – its price is not supported by the company’s fundamentals, history, or future. If I owned any shares of Hertz, I would sell them as soon as possible.