Although I believe the future belongs to renewable energy and electric vehicles, the transition is going to be bumpy. This is something I have emphasized for years. This year provides a great example.
Renewables got off to a great start this year, but then higher interest rates started to impact growth projections.
In late September NextEra Energy Partners LP (NYSE: NEP), a publicly traded subsidiary of NextEra Energy (NYSE: NEE), announced that it was revising its distribution growth rate expectations from 12% to 15% per annum to 5% to 8%. NEP has a capital-intensive business model that is becoming increasingly challenged in the current interest rate environment. NEP units plunged by over 50% in the wake of the news.
The same thing has been happening across the environmental, social, and corporate governance (ESG) investing space. One company after another has seen its shares plunge as growth expectations have been lowered.
The car rental company Hertz is the latest victim, albeit the causes are more complex than simply the rise in interest rates. In its recent Q3 2023 earnings call, Hertz reported strong demand and utilization for its vehicles, but its adjusted EBITDA margin of 13% missed expectations due to elevated costs from its growing electric vehicle (EV) fleet.
Hertz has aggressively moved to incorporate EVs into its fleet. In 2021, Hertz announced plans to place 100,000 electric vehicles from Tesla into service by the end of 2022. Those plans have slowed, as the company currently only had about 50,000 EVs in service as of Q3 2023. EVs now comprise 11% of Hertz’s total fleet, with Teslas making up 80% of those vehicles.
It appears that the timing of reaching the 100,000 mark is now uncertain due to a slowdown in its efforts to electrify its fleet. Hertz Chief Executive Officer Stephen Scherr acknowledged this shift during the company’s third-quarter earnings call, stating that Hertz’s integration of electric vehicles will proceed at a slower pace than previously projected.
The reasons given for the impact on earnings were higher collision/damage repairs, and depreciation on EVs. Scherr stated in the Q3 earnings calls that damage costs on EVs have run about twice as high as comparable gasoline vehicles. The higher depreciation issue is because Tesla price cuts have lowered EV residual values.
Excluding EV impacts, Hertz said its EBITDA margin would have been several hundred basis points higher based on the strong underlying demand and cost control. The company maintains a long-term commitment to electrification for competitive reasons.
In summary, Hertz is working to improve EV economics and profitability while maintaining its first-mover advantage in electrification. Hertz is addressing the EV margin challenges through driver re-underwriting, cost negotiations with Tesla, better rental mix, and other initiatives. The firm expects EV economics to improve as it diversifies OEMs and the used market matures. But Hertz will remain selective in EV purchases based on return thresholds.
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