Plunging Used Car Prices Wreak Havoc On Rental Car Bondholders

Once hedge fund darlings, almost no one is more perfectly aligned to get obliterated by falling used car prices than America"s auto rental companies, Hertz and Avis.  As Bloomberg notes today, on a combined basis, Hertz and Avis dump about 400,000 vehicles per year into the used car market and operate fleets that are multiple times larger. 

And with used car prices plunging, bondholders are starting to get slightly anxious about the collateral impact of writing down billions of dollars worth of capital assets.

Debt issued by Hertz Global Holdings Inc. and Avis Budget Group Inc., which had traded at or above par in recent years, tumbled to new lows earlier this month amid signs that used-vehicle prices are dropping twice as much as expected. That’s bad news for companies that collectively have to dispose of about 400,000 vehicles a year, and especially for Hertz, whose junk-rated debt is teetering close to a downgrade.

Hertz and Avis typically buy the cars outright from manufacturers or get them on a contract with a buyback agreement. The latter, called program cars, cost more because manufacturers assume the resale price risk. Vehicles that Avis and Hertz buy outright are called risk cars because rental companies make their own assumptions about what the cars will be worth when it’s time to sell. Combined with closely held Enterprise Holdings Inc., the three companies control more than 95 percent of the U.S. rental fleet, according to Manheim.

Program cars made up only 20 percent of Hertz’s U.S. fleet last year, according to a company filing, less than half the 44 percent for Avis’s total fleet. Hertz will try to buy more of those this year, Chief Financial Officer Tom Kennedy told investors during a February earnings call.

Of course, as J.D. Power pointed out in it"s most recent "NADA Used Car Guide Industry Update," the flood of lease returns has just started to push used car prices lower....

...and, unfortunately, the volume of lease returns is only expected to grow...

...all of which Morgan Stanley thinks could spark a 50% decline in used car prices over the coming of years. 

All of which begs the obvious question of who is right...auto supplier equity holders or Hertz bondholders?

Weight Watchers Stock Soars After Oprah Announces 40 Pound Weight Loss

Just over a year ago, Weight Watchers shorts were crushed when Oprah Winfrey announced she had purchased a 10% stake in the diet company, sending its stock soaring following a furious short squeeze. Following that news, we noted that "going forward every move in the company stock would be a reflection, literally, of what Oprah Winfrey looks like, and certainly her weight, at any given moment is" as she, both a stakeholder and the most prominent customer of the company"s products, would also become its biggest, pardon the pun, proxy.

To be sure, while the fundamentals of WTW remained lousy and the company"s growth prospects were limited, the biggest danger was in sudden, unexpected short squeezes whenever Oprah"s weight would become a topical feature.

Sure enough, having declined consistently since Oprah"s investment last October, and trading near 52 week lows, today Weight Watcher stock soared by 15%, after Winfrey announced that she’d lost 40 pounds using the program. The diet company, whose shares had fallen 54% this year before Thursday’s surge, is unveiling new TV ads featuring Winfrey that tout her weight loss Bloomberg reports.

Though all previous rallies in the stock have faded, any time Winfrey makes an endorsements of Weight Watchers, or updates her weight, the stock gets a temporary jolt. The shares gained 27% over two days last December when Oprah tweeted a video about using the weight-loss program, and there was a 20% bump in January after Winfrey said she had lost 26 pounds while still eating bread every day.

The latest marketing push begins next week, just before the New Year’s holiday. The coming weeks are critical for Weight Watchers: The company typically adds about 40 percent of new customers in the first quarter, when resolutions push people to seek out diets. The stock climbed as high as $12 on Thursday, its biggest intraday gain Since Nov. 4.

Today"s surge is also catalyzed by the substantial short interest overhang, which at 51% of the float, scrambles to cover on days like today.

That said, the long-term thesis remains poor: Weight Watchers has been hit hard by the rise of free fitness apps, and a move away from strict calorie counting among dieters. But Winfrey’s wide-ranging influence has brought new life to the brand. Weight Watchers has added subscribers for three straight quarters after years of declines.

The New York-based company hopes that Winfrey’s new ads, which emphasize that she still enjoys pasta and tacos, will convince dieters that its updated program is an effective weight-loss tool.

"It’s vitally important that Oprah is living the program and articulating it in a way that’s authentic,” said Maurice Herrera, the head of marketing at Weight Watchers. “It really connects with prospective members.”

Despite the subscriber gains, it’s been a rocky year for Weight Watchers. The company has billions in debt, and its stock is heavily shorted. In September, Chief Executive Officer Jim Chambers announced he was leaving after about three years at the helm. That sent the shares plummeting to their lowest level in nearly a year.

As Bloomberg adds, following Chambers departure, Weight Watchers is now being run by a trio of executives who constitute the “interim office of the CEO.”

The ads rolling out next week show Winfrey doing yoga and cooking pasta. As consumers have changed their perception of wellness, Weight Watchers has pivoted to emphasize that weight loss and indulgence aren’t necessarily mutually exclusive. Winfrey will hammer that message home, Herrera said.

“People want to know what’s on her mind and how she’s living her life,” he said. “This will definitely get people’s attention.”

It will also invite a whole new set of shorts who will pressure the stock to new lows, until Oprah next weighing, at which point the cycle will repeat from scratch.