Over the past year, even as oil prices have dropped significantly and the U.S. labor market has improved tremendously, shares of car rental companies Hertz (HTZ) and Avis Budget Group (CAR) have tumbled.
Since July 2014, HTZ stock has sunk 37%, while CAR stock has retreated 25%. Meanwhile, other travel-related stocks have jumped in the past year. Just look at Marriott (MAR) and its 18% jump.
It’s a good bet that these stocks will rebound going forward; their decline looks overdone, given the positive macroeconomic catalysts they enjoy and the fact that one of investors’ main worries about the sector appears to be overdone.
Upsides for CAR and HTZ Stock
Why have CAR stock and HTZ stock performed so poorly over the last year? One reason is speculation that Uber and other up-and-coming car ride sharing services could hurt the car rental companies.
But actually, Credit Suisse last month quoted Avis as saying that it has “seen no impact from ride sharing services in any of their businesses or segments.” It appears that travelers aren’t using Uber and its competitors as substitutes for car rentals.
Most people probably don’t want to spend precious minutes and hours of their vacations waiting for car services to arrive, when they can choose the far more convenient option of having a car available to them at all times.
Meanwhile, of course, the improving employment situation and lower gas prices should spur increased travel in the U.S., boosting the results of Hertz and Avis.
Another reason to buy CAR stock and HTZ stock is the confidence that billionaire investor Carl Icahn has shown in Hertz. The architect of outstanding investments in Netflix (NFLX) and Apple (AAPL), Icahn increased his stake in the car rental company by 33.8% to 52 million shares in the fourth quarter of 2014. The stock accounted for 4.1% of his portfolio as of the fourth quarter.
Also increasing its stake in Hertz in the fourth quarter of 2014 was prominent activist investors Jana Partners. The position accounted for nearly 9% of the fund’s investments as of that quarter. Neither Jana Parnters nor Icahn has subsequently indicated that it has sold any shares in the company.
Downsides for HTZ and CAR Stock
Hertz and Avis Budget Group are still facing some headwinds, however. Hertz has had to restate three years of its financial results and significantly reduce the profit it reported for the fiscal years 2011, 2012 and 2013, which greatly undermined investors’ trust.
Credit Suisse quoted Avis as saying that industry pricing is trending positively from April’s lows, but that it “remains challenged.” Moreover, a price increase implemented by Hertz in June has proven to be ineffective, Avis reportedly said. The companies are also facing reduced international tourism due to the stronger dollar, along with reduced revenue from fuel surcharges in the wake of the decline in gas prices.
Although the drop in gas prices is positive for the car rental companies overall, in that it spurs more travel, this trend does have a negative side. Hertz’s total U.S. revenue per day fell 2% in the first quarter of 2015, partly due to weakness in its equipment rental business, although the company said that bad weather also played a role.
What to Expect from HTZ and CAR
Hertz hired a new CFO in 2013 and installed a new CEO last November, so investors don’t have to worry about trusting the same management team that presided over the accounting mess. The fact that Icahn and JANA have significant investments in the company should also prevent investors from worrying too much about the integrity of the company’s accounting going forward, since Jana and Icahn probably conducted a significant amount of due diligence before making their investments.
As far as prices, Avis reportedly indicated that they were still rising, even though Hertz’s price increase was unsuccessful. If prices continue to rise gradually, the companies should be in good shape. Indeed, Hertz’s new CEO, John Tague, said in a statement in May that, “While the first quarter financial results were unsatisfactory, we have made progress that will lead to a stronger second half performance in 2015 and position us well for 2016.”
Avis Budget Group’s valuation is highly attractive, as the stock is trading at about 11 times analysts’ consensus 2016 EPS estimate. Hertz is trading at around 9 times the 2016 EPS consensus estimate. Particularly for HTZ, that’s a low valuations for a company that’s highly exposed to the growing travel sector and has attracted large investments from Icahn and JANA.
All things considered, Hertz and Avis look poised to rebound as investors realize that the companies won’t be hurt by Uber and similar services.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
