by Susan J. Aluise | June 22, 2012 11:12 am
As summer kicks off in earnest and more consumers take to the road, car-rental companies aim to take advantage of this prime vacation season. But today’s car-rental market is far different than it has been in years past. More competition — including from new, nontraditional players — is forcing rental companies to shift gears.
The companies that best shape their business models to fit today’s market trends and customers will be best poised to reward their shareholders.
The good news for investors in car-rental stocks such as Avis Budget Group (NYSE:CAR), Hertz (NYSE:HTZ), Dollar Thrifty (NYSE:DTG) and hourly rental innovator Zipcar (NASDAQ:ZIP) is that the market is staging a comeback after sluggish rates early this year.
The bad news is that the times and trends have changed, so auto-rental companies’ business models must change, too. Let’s take a look:
Privately held Enterprise Holdings, which includes the Alamo, National and Enterprise brands, is the largest car-rental chain in the U.S., with nearly 1 million cars in service at more than 7,700 U.S. locations, according to Forbes. The company had $14.1 billion in sales last fiscal year — nearly 12% higher than in 2010.
Edge: Size. Enterprise is the largest company in the space, and bigger is often better when it comes to economies of scale. But since Enterprise is not publicly traded, investors have no way in.
Hertz (NYSE:HTZ), which includes Advantage Rent-A-Car, ranks second, with nearly 600,000 vehicles at more than 8,600 locations in 150 countries. HTZ posted about $8.3 billion in sales last year, an increase of nearly 10% over 2010.
Edge: Vehicles and service. Hertz won top honors in Zagat’s best-car-rental-company survey last month, the first such survey the food-and-travel-rating company has published since 1997. Hertz ranked No. 1 in vehicle options, reliability, business travel, leisure travel and eight other survey categories.
With a market cap of $5.3 billion, HTZ is trading a little under $13, 64% below its 52-week low last October. It has a price-to-earnings-growth (PEG) ratio of 0.4, indicating that it is undervalued. Its forward P-E is a little above 9.
Avis Budget (NYSE:CAR) ranks third, with about 450,000 vehicles and 10,000 rental locations in 175 countries, though most of its rental operations are in North America, Europe and Australia. Avis Budget’s 2011 sales were nearly $6 billion, a rise of 14% over 2010.
Edge: Vehicle sales. Rental-vehicle sales always have been a key part of CAR’s business model. Now the company is working to enhance that edge with the “Ultimate Test Drive.” Launched on Wednesday, the program allows prospective buyers of former rental vehicles to schedule free, two-hour test drives through AutoNation (NYSE:AN). Test drives of as long as three days are available for a nominal rental fee.
With a market cap of only about $1.5 billion, CAR is trading around $14.50 — 73% above its 52-week low last October. Its PEG ratio is a puny 0.2, and its forward P-E is a little over 2, suggesting that this is a very undervalued stock.
Dollar Thrifty (NYSE:DTG) boasts a fleet of about 100,000 vehicles at 1,600 corporate and franchised locations around the world, some 600 of which are in the U.S. The company posted about $1.5 billion in sales in 2011.
Edge: Acquisition candidate. Both Hertz and Avis have spent nearly two years wooing DTG. Hertz recently opted to work through antitrust details with the Federal Trade Commission before stepping up to the plate to take another swing at a deal.
This week it may have worked out a plan to put to rest any antitrust issues with the FTC by divesting its Advantage brand to U-Save.
With a market cap of nearly $2.3 billion, DTG is trading at $81, up nearly 60% from its 52-week low last October. It has a PEG ratio of 0.5, indicating that it is undervalued, but its forward P-E of nearly 15 is pretty high.
Zipcar (NYSE:ZIP), the 12-year old hourly rental-car company that upset the apple cart with its rent-by-the-hour business model, had 2011 sales of nearly $242 million. The company boasts a subscription model: It has signed up 670,000 members who pay a $60 annual fee. ZIP has a fleet of nearly 9,000 vehicles, primarily in urban areas and on college campuses.
Edge: Hourly rental pioneer. Finding a new business model in a mature business like rental cars is not easy, but Zipcar found the ultimate untapped niche: young, urban customers who need a car only occasionally — perhaps for only a few hours — and need to make arrangements on the fly.
The concept is brilliant. But the big question is whether the company can sustain its momentum. Hertz and Enterprise already are jumping into the hourly rental space. And Daimler’s Car2go and local peer-to-peer initiatives such as General Motors’ (NYSE:GM) RelayRides could severely impact ZIP’s upside.
With a market cap of about $478 million, ZIP is trading around $11.25, 24% above its 52-week low earlier this month. It has a PEG ratio of 1.7 and a forward P-E of 37 — both of which indicate that the stock is very overvalued.
(Only because we can’t buy Enterprise.)
I rank Avis a close second, though, because of its vehicle sales and other innovations. If HTZ succeeds in its bid to acquire Dollar Thrifty, it will be the nation’s second-largest car-rental service. It also is going head-to-head with Zipcar on hourly rentals in big markets such as Washington, D.C. — and it’s not charging a membership fee.
Even if the DTG deal falls through, Hertz has the strength in airport rentals and self-serve kiosk technology to make its process more cost-effective than its rivals’. And it doesn’t hurt that car-rental customers love the company.
I rank Hertz a buy, with a price target of $20.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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