Hertz (NYSE:HTZ) has decided to give up on the cash cow of wildly overcharging customers for filling up the tank. Instead of charging $7 a gallon for gas, they'll charge the market price. Oh, don't get me wrong, they'll still charge an outrageous fee for putting gas in the tank when the deal kicks in on July 1. They'll just charge a flat fee of $7 to fill up, plus the market price of gas. What does that translate to in terms of pay, about $100 an hour to pump gas?
I'm pleased that Hertz is getting out of the gas gouging business. Maybe that field has just gotten too competitive lately. It's getting harder to shock Americans with preposterous gas prices. Rental car companies have been charging insane gas rates -- almost what you'd pay in Europe at the pump -- for years. Consumers think of it as their evil little profit center, like phone charges at hotels.
In a story at USAToday, the industry claims that it's only overcharging to scare people into bringing the car back full, so they don't have to hassle with storing the fuel and filling up cars. So why don't they charge that rate for prepaid gas? USAToday did a survey and found that rental car companies sold pre-paid gas at about $4 a gallon, but charged about $8 when someone returned the car less than full.
Discounting charges, Marysville, Ohio-based Scotts reported it made $77.7 million, or $1.19 per share for the quarter ended March 29, two cents better than the forecast of analysts surveyed by Thomson Financial. Revenue fell 4% to $958 million. The company also warned that profits would likely fall below Wall Street forecasts for the year.
Pilgrim's Pride, the nation's largest chicken producer, lost $111.5 million, or $1.67 per share, in the three months ended March 29 compared with a loss of $40.1 million, or 60 cents per share, a year earlier. Revenue rose to $2.10 billion. Analysts had expected a loss of 81 cents per share on $2.09 billion in sales. The company said feed costs would probably push the company to another loss in the current quarter as well.
Analysts expect Parsippany, New Jersey-based Avis to break even on a per share basis, on $1.37 billion revenue. In last year's first quarter, the company posted profit of 12 cents per share. It's unclear how much of an effect the current economic conditions will have on Avis's full-year 2008 results, but in April, rival Hertz Global Holdings Inc. (NYSE: HTZ) managed to post an adjusted quarterly profit that beat Wall Street predictions.
Shares of Scotts ended the day up 1.2%, but fell nearly 12% in after-hours trading to $30.00. Pilgrim's Pride fell less than 1% during the day, then another 1.1% after hours to $23.59. Avis also continued its slide into after-hours trading, down to $13.49.
MOST NOTEWORTHY: Yahoo!, Cigna and Aegean Marine were today's noteworthy upgrades:
Citigroup upgraded shares of Yahoo! (NASDAQ: YHOO) to Buy from Hold as they believe Microsoft (NASDAQ: MSFT) is unlikely to walk away from Yahoo! and that there is potential Microsoft could bid $34/share.
Credit Suisse upgraded Cigna (NYSE: CI) to Outperform from Neutral citing the company's favorable business mix.
Stephens upgraded shares of Aegean Marine (NYSE: ANW) to Overweight from Equal Weight on valuation as they see an attractive entry point at current levels.
OTHER UPGRADES:
JMP Securities raised D.R. Horton (NYSE: DHI) to Strong Buy from Outperform and Pulte Homes (NYSE: PHM) to Outperform from Market Perform.
MOST NOTEWORTHY: AVX Corp (AVX), Vishay Intertechnology Inc (VSH), Buffalo Wild Wings (BWLD) and three car-rental companies were today's noteworthy downgrades:
American Technology downgraded both AVX Corp (NYSE: AVX) and Vishay Intertechnology Inc (NYSE: VSH) to Sell from Buy after channel checks suggested weaker than expected demand for the June quarter from Europe, EMS, and distribution.
Sanders Morris believes investors should take profits in Buffalo Wild Wings Inc (NASDAQ: BWLD), cutting shares to Sell from Buy, and sees limited catalysts on the horizon that could drive shares higher.
Now, Hertz has filed for a follow-on offering and may raise as much as $1 billion.
Basically, this is old-fashioned financial engineering – and it has paid off handsomely. Then again, Hertz is a solid company and has growth opportunities.
Even after the offering, the private equity sponsors will still have an equity stake of $3.8 billion.
So far today, Hertz's stock is down $0.08 to $21.17 per share.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
We blogged in November to invest in the Hertz (NYSE: HTZ) IPO and those who suffered through the initial volatility are up close to 20%.
Avis Budget Group (NYSE: CAR) is also a good play on the rental car business. Hertz was acquired by private equity from Ford (NYSE: F) and recently came public. Avis was spun off from Cendant last year. Now the two largest rental car companies are publicly traded.
The mere fact that the two largest players are publicly traded should impose pricing discipline. This should translate into higher earnings and higher stock prices for both players over time.
According to Oscar Schafer in this weekend's Barron's Roundtable (subscription required), he expects the company to earn $3.00 this year. With the stock at $24, that is just 8x earnings.
This stock has rallied a bit most likely on Barron's whispers since the interview was held a few weeks ago and only published this weekend. I'd wait for a little pull back and then jump into this stock.
Yet again, Merrill Lynch & Co, Inc. (NYSE:MER) had a strong quarter, with net income surging 68% to $2.35 billion. There was strength in trading, asset management and of course, investment banking.
But there was another key source of income: investments in buyout deals. And, according to a recent piece in the Wall Street Journal [a paid service], it does pose serious risks.
True, it's lucrative. After all, Merrill also scores big fees on the private equity transactions. Yet, Merrill is making some big bets. For example, it shelled out $1.5 billion for its stake in HCA. This is a hospital chain that must deal with unpredictable government regulations. Also, the deal was done at a fairly high valuation.
So far, though, Merrill's private equity forays have been getting nice returns, especially with the Hertz Global Holdings, Inc. (NYSE:HTZ) deal. But there are many things that can go wrong: a botched deal; a credit crunch; a recession; a bear market.
Interestingly enough, back in the early 1990s, Merrill left the buyout business. Yes, it was because of some ill-conceived deals.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
MOST NOTEWORTHY: Constellation Energy Group (CEG) and Hertz Global Holding (HTZ) were the most notable downgrades this morning.
Deutsche Bank initiated shares of Constellation Energy Group (NYSE: CEG) with a Buy rating and $78 target; the firm said valuation is compelling as the market has barely priced in the valued of BED, the merchant plants and the PV of the current backlog.
Wachovia started shares of Hertz Global Holding (NYSE: HTZ) with a Market Perform rating. They see limited upside to shares due to broader economic concerns.
OTHER INITIATIONS:
Merrill Lynch initiated shares of Winnebago (NYSE: WGO) with a Neutral rating, saying shares are fairly valued.
UBS initiated shares of KBR, Inc. (NYSE: KBR) with a Neutral and $26 target.
Despite a comeback of the IPO market, it was still tough for the Hertz (NYSE:HTZ) offering. Initially, the company tried to price its IPO at $16 to $18 per share. However, it was only able to fetch a final offering price of $15.
The stock has since sputtered -- and this week it broke its offering price, falling to a low of $14.55.
Then again, Hertz Global Holdings, Inc. has become a poster child for the private equity crowd. In other words, the company's investors -- Clayton, Dubilier & Rice and Carlyle Group -- were able to get a big cash-out, and within about a year.
Private equity investors bought Hertz from its struggling corporate parent, Ford Motor Company (NYSE:F). The equity investment was about $2.3 billion, and about $3 billion was borrowed. There was also $10 billion on the balance sheet.
For their efforts, the private equity investors paid themselves a $1 billion dividend -- and then also got an extra $222 million payout because of the IPO.
Keep in mind that when a solid company is spun-off from a lumbering parent it often presents opportunities for public investors. After all, with better focus, there may be improved performance.
But, in the case of Hertz, the private equity investors were able to get a head-start, making it hard for investors to get much benefit going-forward. At least it was a good deal for somebody.
Tom Taulli is the author of various books, including the Complete M&A Handbook. He also operates InvestorOffering.com.
Market observers are always looking for a top. It is that one moment, that one symbolic act, that one windfall beyond belief or act of such stupidity that tells folks that things have gotten as crazy as they are going to get. And it's all downhill from here.
It's the day when irrational exuberance gets drunk on hubris. And a terrible hangover follows.
Well, I have seen the top, and it happened this week.
Was it the announcement that Wall Streeters were going to get $30 billion in bonuses in their Christmas stockings this year? Nope.
Was it the Hertz IPO, you ask, where investors fleeced Ford Motor company (NYSE:F) and made $2 billion in about thirty minutes? No sirree.
Was it Google Inc.(NASDAQ:GOOG) buying YouTube, Inc. for about $10 million dollars per day that the company existed ? Nyet.
Was it the announcement of more than $50 BILLION DOLLARS of deals in one day, which occurred on Monday ? Wrong again!
Cramer already endorsed the NYMEX (NMX) IPO and the KBR (KBR) IPO, but he panned the Hertz (HTZ) IPO.
Cramer said the IPO to avoid this week is Hertz (HTZ). He thinks this one can burn you. This is where the sellers of the IPO make a lot of money, but the new buyers can be left holding the bag. He thinks it can end up being just like the Seally Corp. (NYSE:ZZ) IPO and he won't touch it with a pole.
He said the first thing is to do no harm. He won't use the Vonage Holdings (NYSE:VG) or the Burger King Holdings (NYSE:BKC) deal, but he thinks it will be a disappointment.
This was sold to a private equity group for $15 Billion and the new sale is 27% being sold. They have increased the debt and knocked down earnings. The $16 Billion of the IPO, but over $900 million of the IPO is funding a special dividend and another $400 million is essentially another dividend. The 3 firms also have 7 of 9 board seats and this is one that you need to avoid.
He thinks it won't go above $20.00 after the IPO any time soon and the downside is just too hard to calculate.
Theflyonthewall.com reports that Hertz Global Holdings, the rental car business, which was purchased by private equity less than a year ago, is now going public. Hertz looks to raise $1.5 billion and expects to price the deal between $16 and $18 per share.
This will be one of the highest profile private equity deals to go public. If Hertz does well, more private equity firms may rush to monetize other investments.
The deal looks pretty good. While at first glance, Hertz looks very leveraged, much of the debt is used to finance the purchase of automobiles. As long as the debt matches up with the useful lives of the cars, it should be manageable. In addition, the proceed s of the equity offering and the refinancing of much of the debt should improve the balance sheet.
Often the first few deals are the best on Wall Street. With Hertz being one of the first private-equity high-profile names to go public, this deal looks like it is attractively priced. Theflyonthewall says buy this one before the junk deals get dumped on the public.
As the Private Equity deal juggernaut continues at a record pace, the Justice Department continues to send out letters in their probe of PE competitive behavior. The Wall Street Journal reported today that Merrill Lynch & Co., Inc. (NYSE:MER) has joined this inauspicious list. Other letters in the same form, I am sure, will be received by other players. Any Justice Department investigation is bad news and a distraction, and I am sure there is concern throughout the PE industry.
The question at hand is whether PE firms, in pursuing the "club" deals (many firms getting together to pursue a large target, like a bunch of hunters combining to wrestle an elephant) are "colluding" to bring down prices for the assets they are pursuing, thereby undertaking anti-competitive and thus illegal behavior. The Journal speculates that the Hertz transaction is under particular scrutiny. This was not only a large club deal but one where the buyers made a lot of money VERY quickly. To the Justice Department, I am sure, the fact that big bucks were made in short order MUST mean illegal activity. The Federal Government seems to frown upon large scale success, and therefore must investigate.
I have not seen any of these love letters and can only speculate about the investigation, but the facts of life in Private Equity do not support a case for collusion.
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In late 2005, 
Market observers are always looking for a top. It is that one moment, that one symbolic act, that one windfall beyond belief or act of such stupidity that tells folks that things have gotten as crazy as they are going to get. And it's all downhill from here.
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