Hertz IPO Perfoms Better than Expected

Hertz Global, HTZ, is currently trading at $17 per share today on Dec. 28th, up more than 10% from the IPO price of $15 on Nov. 16th. Lehman Brothers released on Overweight rating on Hertz with a target price of $20 per share two days ago. Lehman cites the experienced management team, the low age of the car fleet relative to its competitors, the cost-cutting expertise of management and the 30% market share they have which towers over their competition. Their 22-page report also predicts robust margin and profit growth due to increased personal and business travel over the next few years. The Lehman reports makes a strong case that Hertz is the best run car rental firm in the world. However, what price is one willing to pay to own a piece of this company. Lehman optimistically predicts Hertz will earn profits of 79 cents per share in 2006 and 95 cents per share in 2007. These estimates far exceed the profit of 64 cents per share in 2006 and 65 cents per share in 2007 predicted o average by analyst submissions to Yahoo Finance. Even in the most optimistic case, the car rental business is a very competitive business and I would not pay more than 14x 2007 earnings estimates for a share of this company which equals $13.3 per share, making HTX overvalued by over 20%. Time will tell whether the auto rental industry is as strong as Lehman anticipates or less robust as I anticipate.