Hertz Global Holdings (NASDAQ: HTZ) Shares initially fell as much as 11.9% on Tuesday after the car rental giant posted a disappointing third-quarter earnings report before the opening bell. However, the stock then made a surprising recovery during the session and was up 9.2% at 3:20 pm ET.

Here’s why.

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Hertz misses the mark

Investors clearly didn’t like the Hertz report at first glance, and it’s clear why.

Revenue fell 5% to $2.58 billion, missing estimates for $2.7 billion. The company also took a $1 billion impairment charge in the quarter due to a decline in the residual values ​​of its fleet. This was the result of an exaggerated push for electric vehicles, whose resale values ​​have fallen, as well as purchases of gas-powered vehicles a few years ago, when their prices were rising due to supply chain shortages. Electric vehicles have been a thorn in Hertz’s side for several quarters, as their repair costs have been higher than expected and demand for them from renters has been lower than expected.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell from a profit of $359 million in the year-ago quarter to a loss of $157 million this time due to increased vehicle depreciation.

Bottom line, the company reported an adjusted loss of $0.68 per share, down from a profit of $0.70 per share in Q3 2023 and below the consensus estimate for a loss of $0.50 per share.

CEO Gil West said the company was implementing its “back-to-basics strategy,” although he added there was “more work to be done.”

Why Hertz is back

It wasn’t entirely clear why Hertz stock recovered and jumped into positive territory, but some investors seemed to bet that the biggest pain of Hertz’s turnaround is now behind it and has piled up in the stock, which is trading near record lows. historical and are valued at a cheap price-to-sales ratio of only about 0.1. If the business can become solidly profitable, the stock should rise considerably.

Hertz said it will sell 30,000 electric vehicles by the end of the year to resize its fleet and said it expects to complete its broader fleet refresh by the end of 2025.

The car rental industry is also cyclical, dependent on business activity and travel, and investors appear to be anticipating a period of economic growth that would be a tailwind for Hertz.

While the company isn’t out of the woods yet, it’s easy to see the stock’s upside potential, especially if business and consumer spending picks up.

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Jeremy Bowman has no position in any of the shares mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.