Hertz Hits the Gas With Dollar Thrifty Buy

by Dan Burrows | August 27, 2012 12:09 pm

More consolidation in the rental car industry makes it looks like Avis (NYSE:CAR[1]) is going to have to try harder — much harder.

After more than two years on the hunt, rival Hertz (NYSE:HTZ[2]) finally landed acquisition-prize Dollar Thrifty (NYSE:DTG[3]) for about $2.3 billion in cash, or $87.50 a share.

That’s good news for Dollar Thrifty shareholders, who’ve seen their stock soar ever since the company was put in play. Three years ago, the budget car rental company was trading at about $25. Dollar Thrifty got a huge leg up a couple years ago when Avis first offered $41 a share for the company. Anyone who stuck with Dollar Thrifty over that period is looking at a gain of about 270%.

The deal is also good news for Hertz, as it adds instant scale and an entirely different segment of customers to its business. Hertz is the second-biggest car rental company after privately-held Enterprise and caters mostly to business travelers. Dollar Thrifty, 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.

Hertz Chairman and CEO Mark Frissora said just that in a statement announcing the deal:

“The transaction provides Hertz instant scale with two new, well-established brands with airport concession infrastructure in the mid-tier value segment. We’ll be a stronger global competitive player … not only in the U.S. but in Europe and other markets, given Dollar Thrifty’s strong international presence.”

And all of this will push Avis into the No. 3 position, leaving it in the dust by quite a stretch. Enterprise, with 38% of the U.S. market, is by far the biggest player. After adding in Dollar Thrifty, Hertz will jump to almost 24% from 18.9% market share. And Avis, formerly neck and neck with Hertz, will lag behind at about 18.5% market share.

But that hardly means the wheels have fallen off for Avis or its shareholders.

For one thing, consolidation has been the name of the game in the rental car industry for the better part of a decade. There used to be nine big independent names — now there will be just three. And since Enterprise is privately held, only Hertz and Avis offer traders and investors a way to bet on this sector of the travel business.

Furthermore, Avis has been one heck of a holding in 2012. Yes, it’s been brutally volatile. With a beta of more than 3, it’s more than three times more jumpy than the S&P 500. But it also has gained about 50% for the year-to-date. Hertz, with a 12% gain, has only matched the performance of the S&P 500, while Dollar Thrifty tacked on 15%.

Avis also looks to offer investors a compelling valuation at current levels. The stock trades at a forward price-to-earning multiple of just 6, or a 50% discount to the broader market. But Wall Street forecasts a long-term earnings growth rate of 15% for Avis — or about 50% better than the S&P 500.

Increased competition and the sluggish recovery do add a great deal of uncertainty to its stock prospects — there’s no question that Avis really will have to try harder. But now that the overhang of further industry consolidation has been lifted, at least management and the market can turn their attention back to the fundamentals.

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

  1. CAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAR
  2. HTZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTZ
  3. DTG: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTG

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