Hertz and Amazon Strike a Deal, and Hertz Investors Could Be Reaping the Rewards

Key Points

• The longtime car rental company will sell used vehicles on Amazon's website.

• The deal offers the potential to greatly expand Hertz's used car sales business.

• 10 stocks we like better than Hertz Global ›

Hertz Global (NASDAQ: HTZ) and Amazon (NASDAQ: AMZN) recently announced a deal in which the former will sell used cars on the latter's website. Investors clearly believe the deal will help Hertz's business. They sent the share price up 12.5%, from $5.20 to $5.85, from Aug. 19 through Aug. 27.

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What has investors so excited? And, more importantly, is the deal a long-term value-creating opportunity for Hertz? It's time to look closer at the deal and Hertz's fundamentals.

Image source: Getty Images.

Deal details

Hertz will list its used vehicles for sale on the Amazon Autos website. However, it's only a test right now, and it's being rolled out in the metro areas of Dallas, Houston, Los Angeles, and Seattle. Car buyers can go on the site and browse used vehicles to purchase. Once they find something and complete the purchase, the new car owner can pick up the vehicle at various Hertz locations.

The benefits to Amazon Auto, which launched less than a year ago, are clear. The site previously offered car buyers with limited options. Under this arrangement, Amazon will greatly expand the number of listings across many more brands.

How does Hertz benefit?

If car buyers are willing to shop online for used cars, they'll get an easier and more convenient process with a broad selection of automobiles. That could expand Hertz's car sales.

Currently, Hertz sells its rental fleet cars through company-operated U.S. retail locations. This also produces other revenue, such as from selling warranties and providing financing. It's unclear how many used vehicles Hertz sells, however. The company has mentioned that it sells thousands, but that makes it challenging to pinpoint the impact on Hertz's cash flow.

Still, if the arrangement with Amazon proves mutually beneficial, Hertz will be able to scale the used car business and diversify its revenue stream. It's also a step toward executing CEO Gil West's plan to expand its retail business and raise awareness of the Hertz used car brand

Should you buy Hertz's stock?

Hertz operates two segments: Americas RAC and international RAC. Each division rents vehicles and sells services like insurance and satellite radio. Right now, Hertz's core rental business has been struggling, with shrinking sales and declining profitability. The company's total second-quarter revenue dropped 7% to $2.2 billion, and it lost $104 million after adjusting for certain items.

It seems challenging to expand into other areas while its core rental business has struggled. Still, if Hertz can pull it off, shareholders could see a lot of upside based on the company's valuation. You can use the price-to-sales (P/S) multiple rather than the more traditional price-to-earnings (P/E) ratio, since the company doesn't report a profit. Hertz's share price zoomed up 74% in the past year, and the P/S ratio doubled in the last year, but remains low at 0.2. Small capitalization stocks, as measured by the Russell 2000 index, trade at about a P/S ratio of over 1.

However, while the deal with Amazon may prove advantageous, it's only in the test phase. Hence, long-term investors may wish to hold off, at least until results from the test markets have come in. You'll know whether it's going well if Amazon and Hertz decide to expand the program.

Should you invest $1,000 in Hertz Global right now?

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.