Filed Under: ,
Tickers in this Article: F, HTZ, CAR, DTG
The S&P 500 is down about 14% year-to-date, and car rental stocks are down 78% in the past 12 months, according to Revere Research. For me to suggest investing in a car rental company at this particular time probably appears to be a late April Fool's joke.

It doesn't take a genius to figure out why the industry is struggling; with airfares on the rise and the economy in the tank, fewer and fewer people are choosing to fly these days, and as a result they aren't in need of a rental car when they get to their destination. Travelers are likely to drive their own vehicles shorter distances to attractions closer to home. The result is less business and even less profit.

While car rental companies as a whole are definitely down, they aren't out, not by a long shot. All three of the companies I profile realize they need to move off-airport and into local communities if they are to grow their businesses in the future.

Hertz (NYSE:HTZ)
The ubiquitous Hertz is the largest car rental company in the world, operating in 147 countries offering vehicles made by Ford (NYSE:F), Mercedes Benz and others. Revenue in 2007 grew to $8.69 billion, an increase of 7.8% annually. Its adjusted pre-tax income grew 35.8% to $660.7 million, a 160 basis point improvement in the adjusted pre-tax margin. These are good numbers for a supposedly faltering business.

How was the first quarter? It reported revenue of $2.04 billion, up 1.9% excluding foreign exchange. International revenue represent 33.3% of system-wide sales, up from 28.4% in 2006. The adjusted pre-tax income was $17.1 million, a 6.2% increase year-over-year. The company forecast 2008 sales of just under $9 billion, which is an increase between 2.5-3.6% and adjusted pre-tax earnings between $725-750 million, an increase of 9.7-13.5%. Considering it's still growing and making money, the 76% haircut its stock has received in the last 12 months is without merit. This is a clear example of throwing the baby out with the bathwater. (To read about getting through a slow economy, see Five Strategies For Surviving Tough Times.)

Avis (NYSE:CAR)
The company consists of Avis (63% of revenue), Budget (30% of revenue) and Budget Truck (7% of revenue). Avis rents to the premium market and Budget to the value buyer. Revenue in 2007 were $5.99 billion for 6% growth, with pre-tax income up 15% to $198 million. Its EBITDA margin is 7.2% and with targeted annual savings of $150-$250 million, there is an opportunity to improve on this. Over the past five years, its compound annual growth rate for revenues is 7% and 6% for EBITDA.

First quarter revenues were up 6% to $1.4 billion. Its 2008 guidance called for full-year revenue above that of 2007. In early July, the company made comments about the existing operating environment. While cost savings initiatives are moving smoothly, revenue isn't. The second quarter will be worse than last year's. Airline reductions in flights, will especially hurt the fourth quarter. EBITDA in 2008 will be around $350 million, down from $414 million this past year. Second quarter numbers are out August 6. They aren't going to be pretty.

Dollar Thrifty (NYSE:DTG)
Thrifty's history goes back to 1950 and Dollar's to 1965. They both operate in the value segment. Revenue in 2007 was $1.76 billion, up 6% from $1.66 billion the previous year. Income before taxes was $12.81 million, down from $88.42 million in 2006 and $130.55 million in 2005. As part of its plan for growth, it's expanding its presence in local markets with off-airport stores. Time will tell if this works.

Thrifty received accolades in Entrepreneur Magazine's May 2008 issue, which will certainly help. It was named best car rental value, citing its Blue Chip Express Rental program. Thrifty needs all the good press it can get. On July 1, it announced earnings wouldn't meet expectations due to lower revenue per day and higher depreciation costs. It also said the second half of the year isn't quite as promising as it was two months ago. Dollar/Thrifty stock dropped 37% in just one day. Avis Budget was down 13.4% and Hertz 12%. All three stocks are now under $10. (For more on where to put your money in a bear market, read Surviving Bear Country.)

Bottom Line
Hertz is the most solid of the three rental car companies we've discussed. If you have the stomach for it, this could turn out to be a ten-bagger over time.

To learn how to spot a hidden gem, read Turnaround Stocks: U-Turn To High Returns.

comments powered by Disqus

Trading Center