Stuck in Reverse, is Zipcar a Takeover Target?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the decline in the share price of Facebook has garnered most of the media attention, Zipcar (NYSE: ZIP) has fallen from the $30 level reached on its first day of trading last April to now selling for around $8 a share. Competition from Avis Budget Group (NYSE: CAR), Hertz Global Holdings (NYE: HTZ), Dollar Thrifty Automotive (NYSE: DTG) and Enterprise-Rent-A-Car has brutalized the rental upstart.
The overall business model in the motor vehicle leasing industry is very appealing. Bought at deeply discounted prices due to fleet rate purchasing, the vehicles are often times paid for quickly in just the first year's rentals. Sales of insurance and other add-ons such as GPS devices increase the revenue substantially. Depreciation and other tax breaks are significant. Then the vehicles are sold to recapture most of the capital outlays. So lucrative can this business model be that the Taylor family of St. Louis, the founders and owners of Enterprise-Rent-A-Car and Forbes 400 members, have a net worth of around $10.5 billion, according to Forbes.
Just because it is profitable does not mean that it is easy to make money: far from it in the motor vehicle leasing industry. Zipcar just reported a loss of $422,000 when compared to $5.6 million in Q2 2011. The share price was pounded, however, as both top line and bottom line numbers disappointed the analyst community. Projections of revenue in the $74 to $77 million range for the third quarter of 2012 were also below what Wall Street expected. In another negative indicator for Zipcar, while operating cash flow is positive, free cash flow is negative. As Zipcar has been buying a great deal of automobiles, cash on hand has fallen to $62.66 million and debt has increased to over $120 million.
Declining along with the cash position has been the share price. For the last 52 weeks of market action, Zipcar is down by 62.74%. Year to date, it has fallen by 39.64%. The last month of trading alone witnessed a 28.13% decline.
This fall in the share price is now making Zipcar an attractive takeover target for a competitor such as Avis Budget, Hertz Global, Dollar Thrifty or Enterprise-Rent-a-Car. Each of these evolved through mergers and acquisitions, too. As an example, Enterprise-Rent-A-Car purchased Alamo in 2007. Avis and Budget merged together in 2002.
There is much about Zipcar to entice a buyer. The share price is well below the 52-week high of $22.08. This year, earnings-per-share growth is up by 49.37%. Next year, it is projected to soar by 466.70%. On a quarterly basis, sales growth is higher by more than 15%. Another bullish sign is that Zipcar is continuing to enjoy double-digit growth of roughly 16% in established market revenue.
In addition, in the sincerest form of flattery, competitors have emulated the model of Zipcar. Hertz created a car sharing segment, Hertz On Demand. Enterprise Rent-A-Car also has a car sharing operation, WeCar. Obviously, the Zipcar model has appeal: Indeed, Hertz is seeking to enroll 4 million existing members worldwide into Hertz On Demand. With a churn rate of 98%, however, Zipcar is not losing its members to competitors. That is even more reason for a competitor to buy Zipcar.
With a market capitalization of just over $324 million, Zipcar would be an easy acquisition. It has a unique mode of operation that entails "...a car sharing network for its members in metropolitan areas and on university campuses in the United States, Canada, and the United Kingdom. The company provides its members with self-service vehicles that are located in reserved parking spaces throughout the neighborhoods where they live and work. Its members include individuals, universities, businesses, and government agencies."
Zipcar has 731,000 members and 11,000 vehicles in the United States, Canada, the United Kingdom, Spain and Austria. Zipcar offers more than 30 makes and models of self-service vehicles by the hour or by the day. That would fit in nicely with the business model of a major motor vehicle firm as the global urban population is exploding. The appeal of the hourly motor vehicle rental from Zipcar should increase greatly around the world.
Another sign of this appeal of Zipcar at current price levels is that insiders are starting to buy the stock. According to investing legend Peter Lynch, this insider buying is always a bullish sign as there is only one reason to purchase a stock: an expectation that the share price will rise. Director Stephen M. Case recently acquired 265,976 shares at $7.69 each.
Over the last week of market action, Zipcar is up by 6.58%. The stock price is starting to recover from the disappointing results and the costs of two aquistions in Europe. When the economy of Europe recovers, operations there for Zipcar will contribute more to the bottom line. Until then, Zipcar is very attractively priced with a business model that obviously appeals to both its customers and its competitors.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Hertz Global Holdings and Zipcar. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.