Hertz Global

At face value, Hertz Global Holdings Inc looks inexpensive, following a substantial price decline over the past year. To account for the risk of a possible value trap, we have capped its rating at 3 stars. The stock currently trades at a 31% discount to our quantitative fair value estimate of $3.03 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The firm's balance sheet strengthens our estimated fair value. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. For example, the firm's EBITDA/interest coverage ratio of 3.2 sits in the bottom 30% compared with peers globally. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. We believe this is a sign that shares could be cheap.

Alternatively, the company's lack of profitability is potentially concerning. Companies with low profitability are often less resilient in recessions and are likely to generate weaker future cash flows for shareholders. The firm's earnings yield of -72.2%, for example, falls in the bottom 10% compared with peers globally. The earnings generated by the company relative to its share price is concerning, which, despite our favorable price/fair value ratio, is a negative attribute.

With its quantitative economic moat rating of none, this business is unlikely to consistently outearn its cost of capital without structural protection from competition. Additionally, the company's weak financial health rating could portend bankruptcy risk if economic conditions weaken.