After its buyout in 2005, some observers were convinced that rental car giant Hertz Global Holdings Inc. was being taken for a ride -- and it wasn't a joy ride either.

The iconic company had seen a handful of owners over the years, and when private equity firms Clayton, Dubilier & Rice Inc., Carlyle Group and Merrill Lynch Global Private Equity bought it from Ford Motor Co. for $15 billion in December 2005, critics charged it was about to be stripped and flipped for a profit.

Indeed, within a year's time, the sponsors extracted a $1 billion dividend and took Hertz public. But they held on to their shares in the initial public offering (which diluted their stakes to a combined 72%) and continued to improve its cash flow. All told, given a troublesome economy and relative to its rivals, the world's largest rental car brand has fared reasonably well under its private equity backers.

But that's not an aberration. Hertz has been proving its endurance for nearly a century. The car rental company was founded in 1918 by a young entrepreneur, Walter Jacobs, who began building the business with a dozen Model Ts in Chicago. Within five years, Hertz was generating about $1 million of annual revenue, according to Hertz's Web site.

Jacobs sold the business in 1923 to John Hertz, the president of Yellow Cab and Yellow Truck and Coach Manufacturing Co., and a few years later it was passed on to General Motors Corp. Then, in 1953, Omnibus Corp. bought the company, changing its name to Hertz the following year when it went public on the New York Stock Exchange.

But Hertz's journey from owner to owner wasn't over, not by a long shot. In 1967, Hertz was purchased by RCA Corp. and operated as an independent subsidiary of the electronics and communications company for nearly two decades. In 1985 UAL Corp., the parent of United Airlines, bought it from RCA for $587 million -- a fraction of what CD&R, Carlyle and Merrill Lynch paid Ford for the rental company two decades later when, for a brief moment, it was the largest LBO since Kohlberg Kravis Roberts & Co.'s $25 billion purchase of RJR Nabisco in 1989.

Hertz, the oldest and biggest name in U.S. car rentals, has seen revenue grow at an annual compound rate of 7.3% over the past 20 years, with year-over-year increases for 18 of those. Last year, the company, now based in Park Ridge, N.J., raked in $8.7 billion of revenue.

Today the company is projecting $8.9 billion to $9 billion of revenue for 2008, an increase of 2.5% to 3.6%. It expects corporate Ebitda will climb 2.2%, to 4.8%, to hit as much as $1.6 billion. Levered after-tax cash flows after fleet growth -- an earnings measure that takes out corporate interest and taxes as well as capital expenditure to grow its car fleet -- should ring in between $550 million and $650 million, at least holding steady with last year's results and possibly rising as much 17.6%.

It's still early, but Hertz got off to a fast start in the first quarter. It racked up record worldwide sales of $2 billion for the first three months of 2008, up 6.1% over the same period last year. With the U.S. economy ailing, that surge was fueled by its international operations, which accounted for 33.3% of total revenue and mainly stemmed from Europe. Its Ebitda jumped 9.8%, to $728.6 million, though corporate Ebitda, which takes out car fleet depreciation and interest, was relatively flat, dropping 1.3% to $235 million.

Analysts view first-quarter performance with caution, however. "It's usually a slow period in terms of activity," says Fitch Ratings' William Artz. "Things pick up in the summer, when people start going on vacation."

With prices soaring at the gas pump, it remains to be seen just how willing people are to hit the road. In the past, though, Hertz has not been highly vulnerable to spikes, according to an analyst report from Goldman, Sachs & Co. It points out that Hertz's rental customers tend to be in the top 25% of U.S. households by income, which makes them less vulnerable to gas price shocks. Still, Hertz is trying to make it cheaper for travelers to refuel rentals.

On the verge of its busy season, the company announced that on July 1 it would cut the cost of refueling in the U.S. and Canada, Puerto Rico and St. Thomas. Under the program, those who allow Hertz to refill the tank will be charged local market gas prices, plus a one-time refueling fee of $6.99. Previously, they were hit with a substantial premium that in some areas approached $8 a gallon, according to a spokesman. Customers who agree up front to buy a full tank will get a small discount of roughly 15 cents per gallon.

Hertz wants more than just vacationers and business people to rent its cars. The company is aiming to drum up more revenue from its off-airport segment, which provides replacement vehicles to people whose cars have been in accidents and leisure and commercial rentals. That unit now generates nearly $1 billion of revenue. As evidence of its increasing importance, Hertz recently tapped Scott Sider, who had been Hertz's regional vice president for West Coast car rentals, to fill the division's newly created position of president. "The off-airport business now requires separate, senior-level management to help us drive plans to accelerate profitable growth over the next few years," said chairman and CEO Mark Frissora in a statement in May. (Frissora came to Hertz in 2006 after running Tenneco Inc. for six years) In the insurance replacement vehicle niche, Hertz currently has 9% of the market, a distant second to Enterprise Rent-A-Car Co., with 66%, according to Fitch.

Still, Hertz remains a large and diversified company. It owns the biggest share of the U.S. airport market while running the second-largest commercial equipment rental business in North America, Hertz Equipment Rental Co., or Herc, which brings in 20% of the company's revenue. The downturn in U.S. residential construction -- to which about 25% of its revenue is tied -- has prompted Herc to concentrate more on areas such as power generation and oil and gas exploration.

Apart from the housing slump, Hertz faces other challenges. The Big Three domestic automakers, Ford, GM and Chrysler LLC, have moved to reduce sales to the daily rental market, pushing up fleet costs, according to Moody's Investors Service. Moreover, Hertz has shifted to a riskier strategy: It is buying more "non-program cars," which later are sold into the used-car market rather than back to a car manufacturer at a locked-in price.

In 2005, the so-called risk cars made up 31% of Hertz's U.S. automobile fleet; last year, the portion more than doubled, to 73%. Buying risk cars is cheaper up front, but, says Artz, "time will tell whether that will be a successful strategy."

Not everything looks good. Its levered after-tax cash flow after fleet growth -- a measure of funds available to reduce corporate debt -- plummeted in the first quarter, to negative $232.7 million, a big drop from the $122.9 million it booked the same time last year. For the 12 months leading up to March 31, however, it was positive at $197 million, though still less than half of the $462 million it saw for the same period ended in 2007.

That drop can be attributed to a change in risk composition, according to Hertz CFO Elyse Douglas in an earnings call in April. Risk composition refers to how Hertz manipulates various car-buying programs, some of which may produce greater profit when sold, but at a higher risk. Douglas also attributes that decline to the decision to maintain a larger fleet to accommodate growth and to technical timing issues that kept it from fully utilizing its international fleet financing facility at the end of the quarter.

What this points up is that operating a car and equipment fleet, which includes more than 300,000 vehicles, is expensive and complex, with a number of moving parts. It's the company's biggest cost, representing 30% of total revenue. And according to filings, equity requirements for car rentals -- that is, the amount of money Hertz puts up to buy the cars -- have recently spiked, swelling 87%, to $606 million in the first quarter from $325 million the same time last year.

Each year, Hertz makes some $9 billion worth of consolidated fleet purchases. These days, it is buying fewer cars from its previous owner, Ford, which now provides 26% of its car fleet, down from 44% in 2004. The rental car company has also broadened the mix of suppliers, to include GM, Toyota Motor Corp. and Mazda Motor Corp.

Fleet costs may be heavy, but analysts believe Hertz has ample liquidity to meet upcoming debt payments. Since the LBO, Hertz has shaved off about $1 billion of debt, lowering its leverage multiples as it improved earnings. As of March 31, it carried $11.6 billion of debt, breaking down into $6.6 billion of fleet financing and $5 billion of corporate. At the end of 2007, its total debt stood at 3.4 times Ebitda, regulatory documents show. By contrast, just days after its buyout, the company held $12.52 billion of debt, about 4.4 times Ebitda.

As for cash flow, since 2005 Hertz's Ebitda has grown by roughly $400 million, or 16% per year, with margins improving by about 240 basis points over that period, to 17.7%, from 15.3%. As a result, Hertz looks like a profitable deal for its buyout sponsors, despite the credit crunch and weak economy. The firms, which initially pumped $2.295 billion of equity into the buyout, have already taken their original investment off the table and doubled their money on paper. They've collected roughly $1.26 billion of dividends and pocketed $1.15 billion from a secondary offering in June 2007.

The sponsors took Hertz public when stock markets were stronger and watched the value of their stakes rise before selling them down about six months later. The $1.3 billion IPO priced at $15 a share and the secondary offering at $22.25. That's far from its current trading level of $9.85, which hovers around a 52-week low and values the sponsors' combined 55% stake at about $1.8 billion.

Hertz's shares hit a 52-week high of $27.20 on July 9, 2007, just before the credit crisis began roiling markets and fears of a recession intensified. Broader market concerns have taken a toll. Goldman Sachs analysts wrote in a May 29 report that "we believe liquidity concerns for Hertz are overdone, and have largely been responsible for driving the share price below the IPO price of $15."

The company, which now has a market capitalization of $3.2 billion, isn't alone in suffering from falling share prices. Rival Avis Budget Group Inc., which operates rent-a-car brands Avis and Budget, is currently trading at around $9 a share, tumbling from a high of $30.24 last July.

Still, since going public, Hertz has raked in $800 million of annual growth and more than $900 million of levered after-tax cash flow after fleet growth, giving it a wider margin to pay down debt and reinvest in the business. By 2010, it is on track to generate $800 million in total savings, thanks to cost-cutting initiatives.

That said, where is Hertz headed next? Both its car and equipment rental businesses will have a much larger presence in China and India, according to the spokesman. He says it will be "rapidly expanding" there in coming months and years while looking for ways to drive new growth in Eastern Europe and Latin America as well.

Based on the company's fundamentals and given that the sponsors still hold more than half of Hertz's equity 2 1/2 years after the LBO, it would seem the buyout firms haven't taken any shortcuts to big returns.