By Adil Yousuf
Hertz (HTZ) has been outperforming the S&P (33% vs. 15.5%) and beating analyst estimates consistently for over two years now. The company made a major acquisition (Dollar Thrifty) in Q4 2012 to solidify its position as the #2 player in the U.S. rental-car market, placing itself nicely between Enterprise (#1) and Avis (#3) (CAR)1.
The overhanging questions:
- Is the car rental space an interesting investment opportunity?
- #1 Avis or #2 Hertz?
Before we deep dive into the company’s strengths and financials, let’s analyze the prospects of the rental car industry.
The rental car industry has been in a recovery mode over the last 2 years now. The global recession negatively impacted travel in general. Rising levels of unemployment, reduction in household wealth, loss of corporate travel allowances, and falling disposable incomes together led to a sharp decline in travel and tourism. Now, as the economy is showing signs of improvement and personal incomes are stabilizing, the rental car industry is back in top gear with summer around the corner.
Additionally, the strengthening of the used car market over the last couple of years is also seen as a positive development for the rental car industry2. Since rental firms typically sell the older cars in their fleet to free up capital, the strengthening of this market has been helping the bottom lines of rental firms.
With the rental car industry headed in the right direction, rental car providers like Hertz look well poised to deliver strong returns. Based on Market IQ’s proprietary Fundamental metrics, the forward prospects of Hertz are very promising.
Market IQ places Hertz in the top right quadrant of the Quality-Value chart (see below), indicating high Quality and Investment Value. Market IQ quantifies Quality by evaluating company’s Profitability, Estimate Momentum and Financial Strength. Hertz has a high Quality number, mainly due to consistently growing revenue and earnings numbers.
Hertz is a stronger company relative to Avis based on the Quality metric. Both companies are undervalued relative to other companies within the Rental Car industry. Avis does rank higher from an Investment Value perspective versus Hertz3, but that is a premium we are happy to pay for the #2 company in the space. Additionally, Hertz has stronger leverage ratios4 and higher Estimate Momentum (a Proprietary Market IQ metric to help you understand the magnitude and direction of change in Analysts forecasted earnings).
On February 25, 2013, the company reported a loss for Q4 2012 hurt by higher costs and charges related to the acquisition of Dollar Thrifty Automotive Group5. Adjusted earnings and revenues however surpassed Wall Street expectations (actual: 33 cents per share on $2.32 BB vs. analyst: 31 cents per share on $2.27BB).
Buoyed by better-than-expected adjusted earnings, robust demand, and improving pricing in North America6, management increased its guidance for 2013. For fiscal 2013, Hertz projected per-share earnings between $1.82 and $1.92 on revenue between $10.85 billion and $10.95 billion. Analysts expected $1.78 and $10.79 billion, respectively.
Hertz’s financials speak volumes about the company’s ability to execute on operational strategy. The company is now focused on realizing cost and revenue synergies from the completed acquisition of Dollar Thrifty, which provided Hertz with better access to the price-oriented leisure travel market7. However, interesting startups like Silver Car (www.silvercar.com) are vying to disrupt the car rental space, starting with the airports – where Hertz generates majority of its revenue. Classic David vs. Goliath brewing.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
- The acquisition of Dollar Thrifty has increased Hertz’s US market share by 5 percent to 23.9 percent. Enterprise and Avis Budget Group Inc. control 38 percent and 18.5 percent of the US rental car industry respectively (Bloomberg).
- The Fed's Beige Book provides a broad overview of the economy. It has highlighted the increase in demand and prices of used cars over the past couple of years.
- Hertz Global (HTZ) has a Price to Equity ratio of 24.7 and a Price to Book value of 3.03. In comparison, Avis Budget Group Inc. (CAR) has a Price to Equity ratio of 10 and a Price to Book value of 3.21.
- Hertz Global (HTZ) and Avis Budget Group Inc. (CAR) have Equity to debt ratio of 0.17 and 0.06 respectively
- Car rental revenue per transaction day at U.S. airports rose 6 percent for Hertz and 2.6 percent for Dollar Thrifty in January with a 1.6 percent increase for Hertz in December and 4.6 percent for Dollar Thrifty.(Reuters)
- Cost synergies from the acquisition are expected to be $300 million from 2013 through 2015, while revenue synergies will be another $300 million over the same period.(Reuters)