Share My Ride? No Thanks...
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The idea of sharing long-lived assets has taken off because of the Internet. Have a room in your house, or the whole house, put it online and “share it,” for a fee. Zipcar (UNKNOWN: ZIP.DL2) is one of the pioneers in the sharing of cars. The basic business model is no different than a company that owns airplanes and leases them to airlines. While the proposed acquisition of Zipcar by Avis Budget Group (NASDAQ: CAR) validates the business model, it doesn't make Avis or Zipcar a buy.
The idea behind car rentals is simple and has been around for a long time. You go somewhere and need a car, but buying one would be impractical because you only need it for a few days. So, you pay for the use of a car that someone else owns. This is similar to the model used for rail cars and airplanes, which can be very profitable businesses, only the “leases” are much shorter for automobiles.
Zipcar took this model a step further. In large metropolitan areas, there are always good reasons to have a car. Trips out of the city, hauling things from one place to another, or late night city excursions are all great reasons to use a car instead of readily available public transportation options. The problem with a car for city dwellers is cost and convenience. Cars are expensive to own, insure, and park, and, if you do own one, you have to actually find that parking spot.
So, Zipcar purchased the car and let the masses use it. Using a subscription model, which ensures a certain level of revenue, and a per use fee, customers remove all of the headaches of owning a car and get most of the benefits. The cost, meanwhile, is probably reasonable for most customers, since the amount of time they use cars is relatively minimal.
Not a Real Business
When the care sharing model first came on the scene, most of the rental companies suggested it wasn't a workable business, poo pooing the new competition. It turns out, however, that there is a real business opportunity and Avis competitor Hertz entered the market. Although its sharing business is materially smaller than Zipcar's, the move by one of the big boys gave validity to the model.
How great a business it was, though, was still a big question. Zipcar hasn't been particularly profitable and its shares, even after adjusting upward to account for the nearly 50% premium to be paid by Avis, still trade well below their IPO price. Clearly the market wasn't impressed with Zipcar's potential.
A Good Acquisition
The decision by Avis to buy Zipcar is opportunistic. It's getting a big presence in the sharing business very quickly and for a relatively low price. Moreover, it will allow the company to better utilize its fleet of cars in metropolitan areas. These are very good things. Additionally, it quickly puts Avis ahead of its primary rival, Hertz.
For customers it may allow the car sharing model to be extended to smaller cities, with an increased number of distant “drop off” points. From an environmental perspective, it means that fewer people will need to buy cars. Sure the cars that are in the service will be well used, but they will also be better maintained and optimized.
A Rough Business
The problem is that the car rental business isn't a great one. Adding Zipcar does not change that fact. Avis Budget, Hertz, and Zipcar have all had spotty earnings records. While the recession didn't help matters, earnings weren't particularly consistent before 2007. Inconsistent earnings typically results in volatile share prices. The addition of Zipcar won't change that for Avis, no matter how many synergies exist between the two companies.
Don't get caught up in the acquisition, avoid the whole sector.
ReubenGBrewer 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!