Executive Summary / Key Takeaways

• Hertz has completed a transformative fleet rotation that has turned its largest cost center into a competitive advantage, with over 80% of its U.S. core rental fleet now under 12 months old, driving depreciation per unit below $300 and delivering the company's first positive EPS in over two years in Q3 2025.

• The "Back to Basics" strategy is demonstrating tangible results across all key metrics: record utilization of 84% (highest since 2018), Adjusted Corporate EBITDA of $190 million in Q3, and a 70% conversion rate on the Rent2Buy program that is transforming car sales from a cost of fleet rotation into a profit-accretive engine.

• Hertz is evolving beyond traditional car rental into a diversified mobility platform, with technology partnerships (Palantir (PLTR), UVeye, Amadeus (AMADY), Decagon), digital retail channels (Amazon Autos (AMZN), HertzCarSales.com), and targeted growth in off-airport and rideshare segments expected to expand at 10-20% in 2026.

• Despite operational improvements, the company carries significant financial leverage with an enterprise value of $20.18 billion against a market cap of $1.58 billion, creating a high-stakes bet on management's ability to deliver $1 billion in EBITDA by 2027.

• The investment thesis hinges on two critical variables: whether Hertz can sustain sub-$300 DPU while growing fleet in a competitive market, and whether the mobility platform expansion can generate sufficient incremental margin to offset the cyclicality and capital intensity of the core rental business.

Setting the Scene: A Century-Old Brand Reborn

Hertz Global Holdings traces its origins to 1918, but the company investors evaluate today is effectively a 2021 creation, having emerged from bankruptcy reorganization and relisted after the pandemic shattered the travel industry. This clean slate, while painful, provided the catalyst for the most radical fleet transformation in the company's history. Hertz operates two geographic segments: Americas RAC (77% of Q3 2025 revenue) and International RAC (23%), serving leisure and business travelers through airport and off-airport locations under the Hertz, Dollar, and Thrifty brands.

The car rental industry is a $60.7 billion oligopoly in the United States, dominated by Enterprise (40-50% market share), Avis Budget Group (CAR) (20-25%), and Hertz (15-20%). This structure creates intense pricing pressure but also barriers to entry that protect incumbents. The business model is capital-intensive and cyclical, with profitability hinging on three variables: fleet cost (depreciation), utilization, and revenue per unit. For decades, Hertz managed this equation poorly, culminating in a disastrous bet on electric vehicles that forced a $168 million settlement for false arrests and a $1.5 billion write-down in 2024.

The appointment of Gil West as CEO in June 2024 marked a decisive pivot. West, formerly of Delta Air Lines (DAL), brought operational discipline to a company that had lost control of its core economics. His "Back to Basics" roadmap—disciplined fleet management, revenue optimization, and rigorous cost control—targets specific North Star metrics: DPU below $300, RPU above $1,500, and DOE per day in the low $30s. These are not aspirational goals but operational guardrails that determine whether Hertz can generate returns above its cost of capital.

Technology, Products, and Strategic Differentiation

The fleet transformation is the foundation of Hertz's competitive repositioning. By year-end 2024, over 60% of the global fleet comprised vehicles one year old or less, reaching over 80% of the U.S. core rental fleet by Q2 2025. This youth movement matters because newer vehicles command higher residuals, require less maintenance, and enhance customer satisfaction. In Q3 2025, DPU fell to $273 per month, below the critical $300 threshold, while utilization hit a record 84%—the highest since 2018. This combination of lower cost and higher productivity is the operational definition of a moat in car rental.

Hertz Car Sales represents the most significant strategic evolution. The company is transforming this business from a passive fleet rotation mechanism into an active profit engine. The Rent2Buy program, offering three-day test drives in over 100 cities, achieves a 70% conversion rate—far exceeding traditional dealership performance. The September 2025 launch of a fully online buying experience at HertzCarSales.com and the August 2025 partnership with Amazon Autos enable customers to browse, finance, and purchase vehicles digitally. Management estimates these direct-to-consumer channels capture $2,000 or more in incremental margin per vehicle compared to wholesale auctions.

Technology partnerships extend this platform vision. Palantir optimizes fleet and workforce planning, UVeye provides AI-powered vehicle inspections, Amadeus modernizes revenue management, and Decagon powers AI-driven customer service. These integrations matter because they reduce friction and cost while improving the customer experience. In Q3 2025, AI handled 72% of U.S. inbound chats, and the Net Promoter Score rose nearly 50% year-over-year. This digital infrastructure positions Hertz to compete not just with Avis and Enterprise, but with emerging mobility platforms and direct-to-consumer disruptors.

Financial Performance & Segment Dynamics: Evidence of Execution

Q3 2025 results validate the transformation thesis. Revenue of $2.478 billion declined 4% year-over-year, reflecting competitive pricing pressure and fleet mix changes, yet the company delivered positive diluted EPS of $0.42—its first in over two years. This profitability breakthrough came despite revenue headwinds, proving that cost structure improvement can drive earnings even in a challenging demand environment.

The segment performance reveals a tale of two markets. Americas RAC revenue fell 7% to $1.910 billion, pressured by lower pricing and volume. However, segment Adjusted EBITDA of $152 million demonstrates operational leverage, as depreciation expense plummeted $467 million due to the fleet refresh and stronger residual values. International RAC grew revenue 10% to $568 million, driven by higher volume and pricing, with Adjusted EBITDA of $100 million nearly doubling from $63 million in Q3 2024. This geographic diversification provides a natural hedge against U.S. market softness.

Unit economics show systematic improvement. RPU held nearly flat at $1,530 despite RPD declining 4%, as utilization gains offset pricing pressure. DOE per day improved both sequentially and annually, declining 1% in Q3 and expected to fall another 5% in Q4 2025 after adjusting for a prior-year insurance reserve true-up. The newer fleet drives better reliability and lower maintenance costs, creating a virtuous cycle where capital investment reduces operating expenses.

The balance sheet reflects both progress and constraint. As of September 30, 2025, Hertz held $1.1 billion in cash and $2.214 billion in total corporate liquidity, providing adequate runway to execute the strategy. However, net financing cash inflows of $675 million for the nine-month period and the issuance of $425 million in 5.5% exchangeable notes demonstrate ongoing reliance on external capital. The company remains in compliance with debt covenants, but the enterprise value of $20.18 billion towers over the $1.58 billion market cap, indicating substantial leverage that amplifies both upside and downside.

Outlook, Guidance, and Execution Risk

Management's guidance frames 2026 as an inflection year. The company targets EBITDA margins of 3-6% and aims to grow the fleet in three distinct segments: airport business at GDP-like low single-digit rates, off-airport business in the mid-to-high single digits, and emerging mobility business at 10-20%. This tiered growth strategy acknowledges that different markets require different capital allocation and pricing approaches. The mobility segment, while small today, represents the future platform vision that could diversify Hertz away from pure rental cyclicality.

The path to $1 billion in EBITDA by 2027 depends on sustaining sub-$300 DPU while scaling revenue. Management expects net DPU to remain well below $300 in 2026, supported by stable residuals and disciplined model year 2026 purchasing (over 80% already procured). However, Q4 2025 guidance was revised to "slightly negative" EBITDA margin due to seasonal leisure troughs, government shutdown impact, and $10-20 million in lost revenue from external system outages. This caution suggests management is prioritizing operational integrity over short-term profit, a trade-off that long-term investors should welcome.

Execution risk centers on fleet management precision. Hertz must balance growth with residual value protection, as the company sells approximately half its fleet annually. While competitors like Avis Budget send 15-20% of vehicles to low-margin wholesale auctions, Hertz keeps this below 10%, instead routing inventory through higher-margin retail channels. This strategy requires accurate demand forecasting and pricing discipline—capabilities that the Amadeus partnership and Palantir integration aim to enhance.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is the debt burden and associated interest expense. Non-vehicle interest expense increased $193 million for the nine months ended September 30, 2025, driven by unrealized losses on exchange features, higher rates, and increased debt levels. The company faces a potential $334 million make-whole premium litigation related to its 2026 and 2028 Notes, with the U.S. Supreme Court petition pending. If the Delaware Bankruptcy Court enters judgment against Hertz, payment could materially impact financial condition. This legal overhang creates uncertainty that weighs on valuation despite operational improvements.

Competitive dynamics present a structural challenge. Enterprise's unmatched scale and local market penetration enable cost leadership that Hertz cannot easily replicate. Avis Budget's stronger international presence and higher operating margins (20.94% vs Hertz's 11.98%) demonstrate superior execution in fleet optimization. Sixt (SXTGY)'s premium positioning and 19% EBT margins show that brand differentiation can drive profitability, but Hertz's multi-brand strategy (Hertz, Dollar, Thrifty) may lack the cohesive premium identity needed to command pricing power.

The EV reduction, while necessary, highlights strategic misexecution. The 30,000-vehicle EV cull announced in 2023 cost billions in write-downs and damaged brand reputation through false arrest incidents. Management now acknowledges EVs only where product-market fit and infrastructure exist, primarily in rideshare. This retreat from innovation to core competency is prudent but suggests Hertz may be a follower rather than a leader in mobility transformation.

Macroeconomic cyclicality remains the existential threat. Travel demand is inherently seasonal and recession-sensitive. The 2% of the U.S. fleet under recall in Q3 2025—1.5 points higher than normal—demonstrates how external shocks can disrupt even well-executed fleet plans. Tariff impacts, while currently viewed as beneficial to residuals, could increase new vehicle costs and constrain fleet growth if trade policy shifts.

Valuation Context: Pricing a Transformation

At $5.06 per share, Hertz trades at an enterprise value-to-revenue multiple of 2.37x, below Avis Budget's 2.87x but above Sixt's 1.63x. This positioning reflects the market's skepticism about Hertz's ability to sustain profitability relative to better-capitalized peers. The EV/EBITDA ratio of 651x is mathematically correct but economically meaningless given the company's recent return to positive EBITDA; it simply reflects the denominator's near-zero base during the transformation phase.

What matters is the trajectory toward management's $1 billion EBITDA target by 2027. If achieved, the current enterprise value would imply a multiple of approximately 20x EBITDA—a reasonable valuation for a cyclical business with improving fundamentals. The key metrics to monitor are DPU sustainability below $300, RPU growth above $1,500, and DOE per day compression into the low $30s. These operational indicators will determine whether Hertz can generate the $600-800 million in incremental EBITDA needed to hit the 2027 goal.

Comparative analysis highlights the opportunity and risk. Avis Budget generates $559 million in quarterly Adjusted EBITDA on $3.5 billion in revenue, demonstrating the earnings power of a well-run rental business at scale. Sixt's 22.45% operating margin and 4.88% return on assets show that premium positioning can deliver superior returns. Hertz's negative return on equity (-567%) and return on assets (-0.24%) reflect recent losses and high leverage, but the Q3 2025 return to positive net income ($184 million) suggests these metrics should improve as the fleet transformation matures.

The balance sheet provides both cushion and constraint. With $2.214 billion in available liquidity and no immediate covenant breaches, Hertz has the financial flexibility to execute its plan. However, the company must generate sufficient free cash flow to service debt and fund fleet growth without relying on external capital markets, which may be less accommodating if economic conditions deteriorate.

Conclusion: A High-Conviction Turnaround with Asymmetric Risk-Reward

Hertz has engineered a remarkable operational turnaround, transforming its fleet from a depreciating liability into a competitive weapon while building the digital infrastructure to support a mobility platform beyond traditional rental. The Q3 2025 results—positive EPS, record utilization, and sub-$300 DPU—provide tangible evidence that the "Back to Basics" strategy is working. The expansion into car sales and technology partnerships creates multiple avenues for margin expansion and revenue diversification.

The investment case, however, remains a high-stakes bet on execution in a leveraged, cyclical business. The $20 billion enterprise value relative to $1.6 billion market cap creates a coiled spring: if Hertz hits its $1 billion EBITDA target by 2027, equity holders could see substantial returns, but any operational stumble or cyclical downturn would likely trigger distress given the debt burden. The competitive landscape shows that efficient operators can generate 20%+ operating margins, proving the earnings potential exists.

For investors, the critical variables are straightforward: monitor DPU monthly to ensure fleet economics remain intact, track RPU trends to gauge pricing power versus Enterprise and Avis, and watch the mobility segment's growth rate to assess platform diversification. If these metrics hold steady through 2026, Hertz will have transformed from a bankruptcy recovery story into a legitimate industrial compounder. If they falter, the capital structure leaves little margin for error.