Vehicle Rental Stocks Continue Driving Forward

By Justin Kuepper | November 30, 2012 AAA

The automotive industry has been a strong performer over the past year and those trends aren't showing any signs of slowing. November automotive sales are expected to grow at their fastest pace in more than four years, according to several industry analysts. But, one corner of the industry tends to be overlooked by investors: rental vehicles.

Rental car and equipment companies like Hertz Global Holdings Inc. (NYSE:HTZ), Avis Budget Group Inc. (Nasdaq:CAR) and Dollar Thrifty Automotive Group Inc. have seen their shares rise 33, 88, and 24% so far this year, respectively. Even moving and storage company, Amerco (Nasdaq:UHAL), saw its shares rise more than 32% so far this year.

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Solid Fundamental Drivers
The vehicle rental industry has been driven by a number of different factors. Perhaps most importantly, business and leisure travel has picked up over the past several years. The U.S. Travel Association expects travel activity in the United States to reach record-breaking levels in 2013, with an increase of 1.1% over this year's levels, suggesting these trends will continue.

While increased air travel benefits companies like Hertz, Avis and Dollar Thrifty, Amerco's U-Haul has instead benefited from increases in both in-town and one-way moving transactions. The company's self-moving equipment rentals increased 5.2% during the second quarter of its fiscal 2013, while its self-storage business also saw strong improvements.

These increases in moving transactions could be tied to the improving real estate market that's driving people from apartments to homes. Pending home sales rose 5.2% in October to their highest level in over five years, according to the National Association of Realtors. These trends are also continuing to head in the right direction with increased housing affordability.

Hurricane Sandy and Europe
The rental vehicle industry is likely to see mixed results from Hurricane Sandy, but many industry experts believe that it will be a net neutral to positive. On one hand, the hurricane canceled many flights that hurt the business. But on the other hand, many people are renting long-term vehicles while waiting for the insurance claims to process.

Hertz Chairman and CEO Mark Frissora commented on a recent conference call, "We believe that when we look at the equipment rental and the Rent-a-Car business [sic] [it's] a very in-flux situation right now, but net-net it should be neutral to positive ... HERC (the company's equipment rental business) would likely be more positive than Rent-A-Car."

However, one challenging area for some rental companies are European sales, which have slowed due to macroeconomic conditions. For instance, Avis' recent quarterly profit missed analyst estimates due to the weak eurozone economy. Investors may, therefore, want to seek out companies with limited exposure to these markets.

Ideas for Playing the Sector
The rental vehicle market has several interesting dynamics for investors. Hertz's recently approved acquisition of Dollar Thrifty for $2.3 billion in cash is expected by management to generate cost synergies of $160 million per year, and it should help provide additional economies of scale to take market share from competitors like Avis and Enterprise Rent-A-Car.

Companies like Zipcar Inc. (Nasdaq:ZIP) are also new, profitable and growing. Although the car-sharing company reported top-line growth of only 15%, its margins expanded a quarter that some considered transitional. But, investors should be wary of the company's lofty 76 times trailing earnings, which may be too high, given its current growth rates.

The Bottom Line
Looking forward, investors in car rental companies should keep an eye on the airline industry and hotel/hospitality industry as leading indicators, while Amerco investors should watch the housing market and moving trends as leading indicators.

At the time of writing, Justin Kuepper did not own any shares in any company mentioned in this article.

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