Why Zip Makes Avis a Good Buy

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

As many of you Foolish investors may know, the car-sharing service Zipcar (UNKNOWN: ZIP.DL2) was bought for $511 million ($12.25 per share) by Avis Budget Group (NASDAQ: CAR) in a Dec. 21 acquisition. With this acquisition Avis is gaining more control of the car-sharing service, but can the company continue to compete in the car-rental industry?

How the Car Rental Industry Looks.

The acquisition of Zipcar is just the latest in the battle to control the car rental industry. Back in October Hertz Global Holdings (NYSE: HTZ) bought out Dollar Thrifty Automotive Group, outbidding Avis. This means that the car rental playing field is controlled by Avis, Hertz, and Enterprise. Hertz’s acquisition of Dollar Thrifty practically forced Avis to go for Zipcar to keep up, and now has the potential to help Avis take over the the car-sharing market.

The Value of Zipcar

Zipcar was founded in 2000 and offers membership based car-sharing. One of the first companies to enter the new market of car-sharing, they also have experience in acquisitions, buying Streetcar in 2010 and Avancar in 2012. The company is still in a high growth phase and is only available in large cities, but it's expanding everyday. Revenue has consistently increased every quarter of 2012, and quarter for quarter is up from 2011.

Avis, however, did pay a top premium with the buyout, giving Zip a P/E ratio of 60. This shows that either Avis believes in Zip’s business model or just wanted to close the deal fast. On top of growing out to new cities and towns, Zip plans to bring more options to their customers with Zip for businesses, Zip for government, and a new electric fleet. With a Price to Book ratio of 1.4 before the acquisition, fundamentals look strong for the growing company that expects earnings to double in 2013 and 2014.

The Value of Avis 

Avis is currently trading at a P/E of 15, which is a pretty fair pricing. On the other hand, Hertz currently trades at a 23 P/E. Avis has posted consistent and growing revenue for the past eight quarters, while EPS has fluctuated. In the past quarter Avis posted a $2.62 EPS compared to the $0.74 the previous quarter. Avis also has its bad statistics; long term debt to equity ratio is 13.6 and sales in 2011 were down 6.5% from 2008.

My Conclusion
Zip, an attractive growth business, is the leader of the car-sharing market with a large potential that Avis will be able to grow faster, and farther than Zip previously had the ability to. While Avis may not be the clear winner in the rental car business, Zip gives them some leverage in the war that will be waged between Hertz and Avis. Zipcar was a good looking company that made Avis a buy for those who want to get in on the potential market of car-sharing and for those who believe the upside of car rental business will return with a good economy.

Hjcranford 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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