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Carl Icahn Latest Pick

August 21, 2014 | About:
ovenerio

ovenerio

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In this article let's take a look at Carl Icahn (Trades, Portfolio), the well-recognized billionaire, who yesterday disclosed in a regulatory filing that he had accumulated a 8.48% stake in Hertz Global Holdings (HTZ), a $13.56 billion market cap, which engages in both car and equipment rental businesses primarily in the U.S. and internationally.

The filing

According to the filing, Icahn holds 38.8 million shares, for which he paid $470.5 million. The activist investor has plans to put pressure on the company’s management. This was not the first time during this year; he had a similar attitude with eBay (EBAY) and Family Dollar Stores (FDO).

In the filing it was disclosed he talked about “shareholder value, accounting issues, operational failures, underperformance relative to its peers,” as well as Icahn’s own “lack of confidence in management.” Moreover, as usual he added that he may seek representation on the company’s board.

Hertz´s answer

“The Hertz board and leadership team value the views of all Hertz shareholders and welcome a constructive dialogue with them,” Hertz said in a statement. “All of us at Hertz are focused on addressing the company’s recent challenges. … As we address our challenges, we are confident that execution on these priorities, as well as the company’s $1 billion share repurchase program, will drive enhanced performance and shareholder value.”

Revenues, margins and profitability

Looking at profitability, revenue growth by 10.19% led a great increase in earnings per share – decreased in the most recent quarter compared to the same quarter a year ago. During the past fiscal year, Hertz increased its bottom line by earning $0.76 versus $0.54 in the prior year. This year, Wall Street expects an improvement in earnings ($1.84 versus $0.76).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

HTZ

Hertz

12.49

CAR

Avis Budget Group, Inc.

2.08

URI

United Rentals, Inc.

21.17

 

Industry Median

9.39

The company has a current ROE of 17.06%, which is higher than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 39.7x, trading at a premium compared to an average of 19.6x for the industry. To use another metric, its price-to-book ratio of 4.3x indicates a premium versus the industry average of 1.97x while the price-to-sales ratio of 1.7x is above the industry average of 1.29x. All these ratios indicate that the stock is relatively overvalued.

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“Icahn´s effect”

Shares of the rental car rose on the release of the filing just before the market closed.

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Other hedge funds

Icahn is among investors betting on Hertz because he considered the stock “undervalued.” Also, Jana Partners and Third Point, which are two activist hedge funds, have taken long positions.

Final comment

In the article we focus on the famous American finance tycoon, Carl Icahn (Trades, Portfolio), who is known for his major influence on investing policy and skill in the markets, who is constantly seeking opportunities.

The stock's rise over the past year made it reach a level which is relatively expensive compared to its peers. However, other strengths this company displays justify these higher price levels.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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