Shares in Hertz (NYSE:HTZ) have been lagging rival Avis Budget (NYSE:CAR) in 2012, but now a major acquisition has the stock primed to pull ahead in the rental-car race.
Hertz, the second-largest car-rental company after privately held Enterprise, is about to widen its already considerable lead over No. 3 Avis Budget now that the Federal Trade Commission is set to greenlight its $2.6 billion deal to buy Dollar Thrifty (NYSE:DTG).
Hertz had to agree to sell its Advantage Rent-A-Car brand, as well as divest about 60 airport locations, to win approval — but it will still hold a wide lead over Avis. The combination will give Hertz more than 10,000 locations worldwide and more than $10 billion in annual sales.
Avis, while able to compete on locations, will trail the Hertz-Dollar Thrifty operation by almost $3 billion in annual revenue.
Anticipation of the deal has revved up Hertz’s stock. Yes, it’s just 21% higher year-to-date versus a 49% gain for Avis — but have a look at the pop since the Dollar Thrifty deal was announced in late August. Since then, Hertz has jumped 14%, while Avis is essentially flat. Indeed, since bottoming out in late July, Hertz has tacked on 33%.
It didn’t help Avis that it missed Wall Street’s third-quarter earnings estimate by a wide margin, coming up short by 5 cents a share on sluggish demand in Europe. (Or that Avis punted analysts’ earnings estimates in two of the last four quarters.)
Hertz, meanwhile, beat on earnings by 3 cents a share, extending its winning streak to at least eight quarters.
Investors have other reasons to be keen on this Hertz-Dollar Thrifty deal. For one thing, it should boost the bottom line sharply and immediately, by some analysts’ reckoning.
“As we have long forecast, the acquisition of Dollar Thrifty by Hertz will be highly accretive (based on our estimates), starting in year one,” writes analyst Michael Millman of Millman Research Associates.
Even before factoring in cost savings from combining the two businesses, Millman estimates that Dollar Thrifty will add about 25% to Hertz’s earnings, given current market conditions.
That appears to give the shares a very compelling valuation — but then the same can be said of Avis.
With a forward price-to-earnings ratio (P/E) of 9.4, Hertz offers nearly a 50% discount to its own five-year average, according to data from Thomson Reuters Stock Reports. Avis’ 6.4 forward P/E is also about 50% below its own five-year average.
It’s hard to see either stock benefiting much from multiple expansion while Europe’s economies continue to contract. However, the long-term earnings prospects make both names look attractive at current levels, and Hertz really stands out.
Analysts peg Avis’ long-term earnings growth rate at more than 18% a year. That’s pretty great, but Hertz is forecast to increase earnings at more than a 38% rate. (Thanks, Dollar Thrifty!)
Although both names look compelling at current levels, if you’re looking to add a rental-car company to your portfolio, Hertz’s superior growth prospects in wake of the merger give it the edge.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.