Car Rental Companies May Have More Upside

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Car Rental companies have had a great run in the past year, Avis Budget Group (NASDAQ: CAR) tacking on over 50% and Hertz (NYSE: HTZ) good for a rally of around 30%. Boosted by the nascent economic recovery, in the US auto market particularly, they have been growing earnings encouragingly. Still, Avis is still trading at a reasonable valuation despite last year’s rally As such; the stock may have more room to rise from a fundamental point of view.

Stock at a Glance

Avis is one of the world’s largest car and truck rental companies with over 5,000 locations worldwide and around 20,000 employees. Its rental fleet comprises almost 400,000 vehicles. The stock has a market cap of $2.33 billion and has a rather high beta of 2.76. The stock price is just off its 52-week high. At the moment, Avis does not pay a dividend. Avis, in a bid to enter the car-sharing market, recently acquired Zipcar for $511 million, or a fairly pricey $12.25 per share, pretty much all the cash they have on the books.

Earnings

Despite missing estimates, Avis delivered quite good results for Q3 2012. Revenue was up 34% compared to Q3 2011 and the company actually had its best quarterly earnings ever. Diluted EPS was up 43% to $1.46. It may be worth noting that the company typically has its highest earnings in the third quarter, and has for the last 5 years posted a loss in Q4. It is estimated that the company will finally turn a profit in Q4 2013. Hertz has also been growing earnings steadily, although not as quickly. Q3 2012 adjusted EPS grew by 23.5% to $0.63 beating estimates by two cents. Interestingly, Hertz has posted a profit in Q4 since 2009.

Valuations and Metrics

Avis currently trades at 14x earnings which is quite a fair valuation. The forward P/E is excellent at 8.68 and the 5-year expected PEG ratio is also worth mentioning at only 0.3. Operating margin is quite high nearing 14% and the return on equity is also good at nearly 25%. The company has a lot of debt, nearly $11 billion in fact or just over 4 times their market cap, but this is not unusual for car rental companies as they often use large amounts of debt to fund their huge fleets. Hertz has about $12.7 billion dollars in debt, which about 1,6 times their market cap. Of the two main publicly traded car rental companies, Avis appears to be the cheaper option. Hertz trades at 24.5x earnings and 10.1x forward earnings. Additionally, Hertz trades at 0.88 to sales compared to Avis’ 0.32, and has lower margins as well as return on equity.

Bottom Line

With improving earnings and outlook, car rental companies are enjoying a long rally. This may have put these stocks in an overbought situation at the moment, and as such, investors might be best off waiting for a pullback. However, Avis seems to be valued nicely at the moment, and with encouraging prospects for 2013, the stock may be awaiting more upside in the future. 


DUJames has no position in any stocks mentioned. The Motley Fool recommends Zipcar. The Motley Fool owns shares of Hertz Global Holdings and Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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