Whitney Tilson made a great call with his short K12 position -Tilson notes the latest developments in an email sent to investors. Whitney Tilson also discusses Hertz and why he is still bullish amid concerns over governance and accounting at the company.
Whitney Tilson in his own words below
What Went Wrong At K12 Inc.: The Upstart School Milken Backed?; No Line At The Hertz Counter At SFO – Phew! by Whitney Tilson
1) Here’s an in-depth Bloomberg article about what went wrong at K12 Inc. (NYSE:LRN), in which I’m quoted:
At a September 2013 investment conference, hedge-fund manager Whitney Tilson cited K12’s recruitment methods as one reason why he was shorting its stock, along with weak test results and high student turnover. In a short sale, investors sell borrowed shares, and profit when a stock falls by buying cheaper shares that are returned to the lender.
Three weeks later, shares fell 38 percent in one day because of an announcement about weaker enrollment. Tilson, the managing partner of New York hedge fund Case Capital Management, said one of his funds made $500,000 from the decline in K12 shares.
As a former board member of the National Alliance for Public Charter Schools, Tilson is an unlikely opponent of K12, he said.
“I’m not against charter schools, I’m not against for-profits, I’m not against online,” he said in an interview. “I’m just against all of those things run amok.”
In a statement, the company said most of Tilson’s analysis was “incorrect or tainted” because he “economically benefited from a negative report.”
It’s ironic that the company says the analysis I presented at my Value Investing Congress 14 months ago on Sept. 17, 2013 (you can see my 133-slide presentation at: www.tilsonfunds.com/K12.pdf) was “incorrect” when, in fact, pretty much everything I said would happen did happen (or is happening), and as a result the stock has collapsed by 2/3, as this stock chart shows:
My investment thesis has largely played out (and I have, unrelated to this particular investment, significantly reduced my short book), so I am no longer short K12 Inc. (NYSE:LRN)’s stock, but I am still following the company closely and will continue to highlight bad things I think the company is doing (and, if warranted, praise good things it’s doing). Speaking of which, one of the reasons I think K12’s enrollment, margins and growth expectations are down (which is why the stock collapsed) is because the company has taken steps to rein in uncontrolled growth and invest more in providing a better education for students. Very small steps, to be sure, but at least ones in the right direction…
2) I was in San Francisco last week for the first time since early August, when I observed an interminable line at the Hertz counter (see the end of this email for my emails with photo and videos to the CEO of Hertz Global Holdings, Inc. (NYSE:HTZ) (who was fired shortly thereafter) and others at the company). I was pleased (both as a customer and shareholder!) to see last Wednesday that there were no lines whatsoever and I had a pleasant experience renting from Hertz this time. Here’s a photo I took:
From: Whitney Tilson
Sent: Tuesday, August 05, 2014 12:49 AM
Subject: Feedback from a shareholder and (currently disgruntled) customer
I am among your smallest shareholders, but also perhaps among your best known thanks to my public profile (Google me) and, in particular, the presentation I gave a little over a year ago at the Value Investing Congress, in which I recommended your stock (see pages 50-63, attached).
I am writing to share with you such a terrible experience I had with Hertz last Friday that I’m considering dumping the stock. The details are in the email (below), which I sent this afternoon to a few dozen friends in the investment business (some of whom are among your largest shareholders).
In addition, further below I have included many of the replies I received, which I also think you will find interesting, especially in light of the fact that these are all very wealthy people – dream customers (also note that I’m not cherry picking only the negative comments – this is all of them).
I hope that my concern – namely, that you are destroying your great brand in an attempt to make your numbers in the short-term – is unfounded, and would welcome a conversation to put my mind at rest.
Does anyone have the email address for Mark Frissora, the CEO of Hertz? I’ve owned the stock for more than a year and it’s up ~20%, but I’m thinking of dumping it after my experience on Friday.
I flew into San Francisco and had a rental for four days. When I went to make my booking a week or two ago, the prices were very high, so I tried Hotwire, which doesn’t tell you which company you’re renting with until you’ve made a nonrefundable booking, but it was half the price I was finding on the regular sites, so I went with it. I expected to be booked at some third-rate place, but was delighted to see that I got Hertz, where I’m a Gold member.
When I went to pick up my car, my name wasn’t on the Hertz Gold board, so I went to the Hertz Gold counter and they said that since I’d booked on Hotwire, they couldn’t help me and told me to go across the hall to the regular Hertz counter.
I could not believe what I saw there: the line went on and on and on and on. You have the watch this video to believe it: http://youtu.be/abKwMrZNt8o. It took my daughter 43 seconds to walk from the start of the line to the end! I’ve never seen anything like it for at any car rental company – and certainly not Hertz, which is supposed to be the premium brand!
There were well over 100 people in line and it was at least a 90-minute wait, so people were furious – I almost felt sorry for the couple of Hertz agents going down the line, asking if anyone had made a regular reservation – if so, they told them to go to the Dollar or Thrifty counters to get a car immediately (both are owned by Hertz). But, like me, nobody had – we had all prepaid, so we were stuck. (Though I got lucky – after about 15 minutes, I went back to the Gold counter and a nice agent took care of me.)
This wasn’t the first time this had happened – the agents said it was like this every Friday in the summer.
This is absolute madness! In order to drive short-term revenues, Hertz is discounting heavily – and then providing a horrifically bad customer experience. If Hertz wants to destroy its brand as quickly as possible, this is exactly how to do it. And I don’t think it’s an accident – it’s deliberate. Which makes me think Hertz management is desperately trying to make its numbers, regardless of the long-term impact.
The reason I’m thinking of dumping the stock is that this reminds me of how RJR destroyed the Winston cigarette brand, which was the #1 brand from 1966-1976. The reason it lost the top spot was, to make its short-term numbers, RJR stuffed the channel, which resulted in old, stale cigarettes, a dramatic loss of market share, and Marlboro taking over the top spot (which it still holds).
I don’t want to over-react to one data point, so I’d welcome any comments.
- I have had similar negative experiences on holiday with my kids. Hertz didn’t have an SUV that we rented and paid for…we had to wait forever in line …finally I screamed at the agent (in Miami) and went to Alamo, got an SUV in 5 seconds and the woman gave me a refund….Something has gone awry.
- I had an unpleasant experience in Kansas City, but I hadn’t paid for it; so, I went to Enterprise.
- I hear you. I had a similar experience at Hertz recently too, and thank god I got a Hertz gold person to help me as I am a gold member and the car wasn’t waiting as I had booked it normally. Avis does a great job but also has long lines. Avis is my biggest position and I bought Hertz too as pricing through the roof should help raise all boats. I’m hoping that the accounting issues are behind them but I agree that my experience was awful last time.
- The same thing happened to me at the Denver airport with Hertz the last TWO times I attended a conference in Vail. A two-hour wait in 2013 and a 90-minute wait in 2014. Do you remember the old Jerry Seinfeld routine about car rental reservations: http://youtu.be/4T2GmGSNvaM? I think this is a sign that the industry has become too consolidated. As consumers we have to put up with this and the RAC companies have all the power.
- Avis tries harder. And the management is better.
For those who are interested, this is how my Hertz story played out.
First, I got this email from Scott Sider, Group President RAC Americas:
Dear Mr. Tilson,
Mark has asked me to personally review your email and the video footage regarding your recent experience in our San Francisco location.
Please accept my apologies for the problems experienced and for the inconvenience caused by the wait time when you arrived at the Hertz counter. Our aim is to consistently deliver the highest level of customer service and there is no excuse for the unacceptable wait that you, and many other customers experienced on Friday.
We do acknowledge that on rare occasions, there can be waits at some of the larger airports depending of air traffic changes to arrival times during busy periods. However, what you experienced has totally shocked me, as clearly it’s not in keeping with the service we are renowned for. I am sincerely sorry for the disruption caused.
Please be assured that I am working with the team in San Francisco in order to improve the efficiency in our demand patterns and line waits. I will also make sure that this is addressed more broadly with my North American VP team this week.
I would really like an opportunity to restore your confidence in the Hertz Brand, and our Management team. Laura Smith, our Senior Director for Customer Service will reach out to you today and see what else we can do to help.
Thanks for getting back to me, but rest assured that this isn’t an outlier. I just returned my car an hour ago at SFO — at noon on a Tuesday — and the line was 90% as long! People were camping in the hallway — the only thing missing were tents. Lest you think I’m exaggerating, I stopped and took pictures and a video that I will send you tomorrow when I get home. I then went upstairs and the line at Avis was maybe 1/10th as long, and there was no line at any other counter.
Call you team in SF and have them walk over there right now to verify what I’m telling you.
What on earth is going on?! A premium brand like Hertz shouldn’t even be on discount sites like Hotwire, much less swamping them to the point where hundreds of people every single day are swearing never to rent from Hertz again.
I then received this email from Laura Smith, Senior Director Service Excellence at Hertz:
Dear Mr Tilson
I understand that you’re travelling, and I’m sorry that you are having to spend time on this.
Scott, the VP for SFO and I spoke again today regarding your feedback. We take it very seriously and I would love an opportunity to speak with you directly, so we can talk through the details that influenced on Friday and actually continue to impact this week – as well as the solution implemented that we expect to have regain full control and return us to normal standard of speed of service from this weekend onwards.
I will try calling you tomorrow at a time that works when you’re home – please let me know when suits.
I just got off the phone with her. She was very nice and apologetic and said my emails, photos and videos had received a great deal of attention at the highest levels of Hertz. She said this was a new problem – not one that’s been going on all summer – and that they were dealing with it and expect it to be resolved by the end of this week. She assured me that what happened was likely due to someone at the local level stretching for revenues rather than a policy decision at the senior level.
Below are some additional comments friends sent me and see next email for the photos I took yesterday, both of which I sent to Laura.
I’d appreciate it if you could let me know about your car rental experiences going forward, especially with Hertz or one of its brands (Thrifty and Dollar).
Additional comments (beyond those in my letter to Mark Frissora):
- Vote with your feet. Avis is so much better.
- I recently rented a car from Hertz at the Charlotte airport. Everything seemed to be going fine (my name was listed as Gold, etc.) until I tried to exit the lot and was told that I had the wrong car (it was in someone else’s name!). I had to exit the lot and circle back around, wait in line at the Gold counter (other customers were having similar issues), and get the car re-issued in my name.
- I do not know why, but SFO has been like this for me with more than one rental company, and it’s truly insane, I ended up giving up and hiring a car!
- In early May, I went to Houston for a day and then Dallas for a day. I had Hertz in Houston and while Gold went fine, the woman at checkout could not work her new tablet computer. It took over five minutes. When I returned the car later that day, there had to be 20+ cars returning at the same time and three agents who also were struggling. I just left my car but never received an emailed receipt. Then I went to Dallas. Both ends of the RAC process were flawless. Oh – and Avis was much less expensive. Hertz gouged me. No comparison.
- I, too, recently had a miserable experience and I’m a Gold member and had my (along with about 40 other travelers) reservation mysteriously disappear from the Gold board on our arrival at LAX.
From: Whitney Tilson
Sent: Tuesday, August 05, 2014 11:41 PM
To: ‘Laura C Smith’
Cc: Scott P Sider
Subject: 7 pictures and two videos for you
I posted my video from today at: http://youtu.be/oVPTWR_g75I and my daughter’s video from Friday is posted at:http://youtu.be/abKwMrZNt8o