Hertz, Avis Stock Rev for More Gains in 2014

by Dan Burrows | December 31, 2013 1:30 pm

After years of consolidation, there are only two rental-car stocks left for investors to consider, and given what they both did in 2013, maybe the industry should have finished its M&A boom years ago.

Hertz185 Hertz, Avis Stock Rev for More Gains in 2014[1]Avis Budget Group (CAR[2]) more than doubled this year, while Hertz Global Holdings (HTZ[3]) gained 69%. The S&P 500 — in a great year for stocks — is set to end 2013 up 29%.

Those market-crushing returns from CAR stock and HTZ stock are all-the-more impressive when you consider the economic headwinds both companies faced in 2013.

Avis Budget took a good beating earlier in the year. Weakness in Europe and Australia — as well as higher fleet costs — caused it to cough up some ugly second- and third-quarter results, both of which missed Wall Street forecasts.

Meanwhile, Hertz stock probably should have stumbled as increased competition and the weak recovery had Hertz issue a tepid outlook and profit warning earlier this year. But talking down expectations was a smart move, as Hertz beat Street estimates every quarter in 2013.

Part of the reason for the amazing outperformance from Avis stock and Hertz stock actually comes from all that consolidation in the rental-carĀ industry. Rental-car companies have been merging for the better part of a decade, and 2013 brought more drama.

After more than two years on the hunt, Hertz finally landed acquisition-prize Dollar Thrifty for about $2.3 billion in cash. With that, the consolidation game pretty much ended. There used to be nine big independent names — now there are just three.

With Enterprise being privately held, only Hertz stock and Avis stock offer traders and investors a way to bet on this sector of the travel business, which is especially sensitive to economic conditions.

HTZ Stock and CAR Stock Pace Economic Recovery

CAR stock and HTZ stock are early cyclicals. They tend to move ahead of the rest of the market, and what they’re saying now is that the economy should be stronger in 2014, both in the U.S and abroad.

Rental-car agencies derive the majority of their revenue from business travelers. When the economy is in a funk, business travel falls off. Fewer deals, lower sales and tighter budgets keep workers close to home. True, economic growth is expected to remain pretty tepid for years to come, but it’s still forecast to grow — and off a low base at that.

Both Avis stock and Hertz stock are also getting applauded for 2013′s dealmaking. Hertz’s acquisition of Dollar Thrifty[4] looks like it will be a winner.

Dollar Thrifty adds instant scale and an entirely different segment of customers to Hertz’s business. Hertz, the second-biggest car rental company after Enterprise, caters mostly to business travelers. Dollar Thrifty, which was the No. 3 player, serves the leisure-travel and budget-customer business. Folding the latter into the former transforms Hertz into a much more formidable global player.

Shareholders in CAR stock have to get used to the fact that Avis is now No. 3, after Enterprise and Hertz — but it’s an easy pill to swallow when Avis stock is up 104% this year. One thing pushing CAR stock was that the company was not content to sit still. Avis kicked off the year by buying Zipcar, the fast-growing car-sharing and hourly rental business, for about $490 million.

Avis may be No. 3, with less than 20% of the market, but it also has the most potential for high-growth[5] coming off that lower base. Even after this year’s epic run, CAR stock trades at forward price-to-earnings multiple of less than 15, even though it has a long-term growth forecast of more than 30%.

It’s unlikely that HTZ stock or CAR stock will put up another year of gains like they did in 2013, but they could still be market-beaters. If the economy does indeed pick up as expected — or grows more rapidly than expectations — Avis stock and Hertz stock will continue to race ahead.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2012/11/Hertz185.jpg
  2. CAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAR
  3. HTZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTZ
  4. acquisition of Dollar Thrifty: http://investorplace.com/2012/08/hertz-hits-the-gas-with-dollar-thrifty-buy/
  5. potential for high-growth: http://investorplace.com/2013/10/hot-growth-stocks-gt-car-mtw/3/

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