Hertz Global Holding (NASDAQ:HTZ) Shares initially fell as much as 11.9% on Tuesday after the auto rental giant released a disappointing third-quarter earnings report before the opening bell. However, the stock later made a surprising recovery throughout the session, rising 9.2% as of 15:20 ET.

Here’s why.

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Hertz misses the mark

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

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

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

As a result, the company reported an adjusted loss of $0.68 per share, below the consensus estimate of a profit of $0.70 per share and a loss of $0.50 per share in the third quarter of 2023.

CEO Gil West said the company was implementing a “back-to-basics strategy” but “there’s still work to be done.”

Why did Hertz come back?

It wasn’t exactly clear why Hertz shares rebounded and jumped into positive territory, but some investors appear to be betting that the worst pain of Hertz’s transformation is now behind them and are piling into the stock, which is trading near historic lows and valued at around 200,000. A cheap price-to-sales ratio of around 0.1. If the business can become solidly profitable, the stock should rise significantly.

To resize its fleet, Hertz said it will sell 30,000 EVs by the end of the year and expects to complete the larger fleet renewal by the end of 2025.

The car rental industry is also cyclical, dependent on business activity and travel, and investors appear to be expecting a period of economic growth that will have a negative impact on Hertz.

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

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