Investors have recently shown great interest in the car rental space. In fact, interest first began to pick up back in December, shortly after Hertz Global Holdings, Inc. (NYSE:HTZ)’s acquisition of Dollar Thrifty Automotive closed. Since then, the market has seen both short-term and long-term investors express interest. Naturally, one might wonder what inning we’re in on the car rental trade, especially given the fact that both Avis Budget Group Inc. (NASDAQ:CAR) and Hertz are up substantially since the start of the year (Avis +58%, Hertz Global Holdings, Inc. (NYSE:HTZ) +54%, and the S&P 500 +16% only). The car rental trade is still in the early-mid innings.
However, the more important question that needs to be answered is which is the best company in the space?
Source of interest
Looking back, the initial spike in interest in the names was driven by a couple of factors:
1. The completion of the Hertz Global Holdings, Inc. (NYSE:HTZ)/Dollar Thrifty deal revived the investment thesis that the car rental companies could benefit from a consolidated industry and more rational industry, even if this notion was still a mere prospect, with the opportunity for oligopoly pricing. At the time, assumptions on U.S. pricing were largely conservative, and understandably so given the historical lack of visibility on pricing.
2. Once the Hertz/Dollar Thrifty deal was complete, rental investors now had, in addition to Avis Budget Group Inc. (NASDAQ:CAR), a second clean name to evaluate, which didn’t have any M&A/event-driven overhang, and which also offered significant market cap for investment (at the time of the deal closing, Hertz Global Holdings, Inc. (NYSE:HTZ) had a market cap of $6.2 billion). The number of new investors looking at the space has increased significantly.
A pricing recovery
The more recent wave of interest on the rental names reflects a greater acceptance that a pricing recovery is on its way, with an optimistic outlook re-affirmed by positive U.S. pricing results for both Hertz and Avis in 1Q (+5% for Hertz, +4% for Avis), even if 1Q was boosted by easy comps. Simply put, the view by investors around pricing is now a function of “when,” not “if” – a significant improvement over the outlook five months ago, when we saw limited pricing visibility.
Moreover, there is greater acceptance that the newly consolidated industry structure is increasingly rational, with all three participants (Avis, Hertz, Enterprise), all looking to maintain or grow profitability, as opposed to volume, ultimately strengthening the argument for oligopoly pricing. Interestingly enough, the interest in the space coincides with the continued normalization of used-car prices, even with rental risk auction pricing starting to post declines on a year-over-year basis.
Has this pricing recovery been factored in the stocks?
Although some of the U.S. pricing recovery has already been baked into both stocks, the rental story is still in the early-mid innings, especially for Hertz Global Holdings, Inc. (NYSE:HTZ). The key pricing development will be in the 3Q, when the big three industry players all have their fleets properly aligned for peak summer demand, and when opportunity exists for leisure pricing to further improve.
Moreover, there is potential for corporate pricing, which has been sluggish until now, to potentially rebound alongside leisure pricing, which has been the primary driver of recent pricing improvements. Indeed, Avis Budget Group Inc. (NASDAQ:CAR) has recently noted that it is looking to gear its corporate pricing agreements moreso around profitability over revenue.
The potential pricing recovery, which would likely be more of a spur for Avis than Hertz, could last another six quarters. Beyond that, the Street doesn’t see a multi-year pricing rebound for the rentals, especially given regulatory risks.
So which one is better: Avis or Hertz?
Although Avis Budget Group Inc. (NASDAQ:CAR) is likely to be the better beneficiary in an increasing price environment than Hertz Global Holdings, Inc. (NYSE:HTZ) and offers a stronger cash flow story (both points have fueled Avis’s outperformance over Hertz), Hertz is preferred over Avis due to:
1. The Dollar Thrifty integration into Hertz is still highly under-appreciated by investors
2. Although Avis is beginning to ramp up its “direct to consumer” vehicle resale mix, Hertz offers significantly better exposure
3. The growth opportunity that Avis Budget Group Inc. (NASDAQ:CAR) has via Zipcar has been amazing, but Hertz offers better growth initiatives than Avis via off-airport initiatives, Donlen, Hertz On-Demand, and Hertz Equipment Rental Corp (HERC)
4. Hertz’s growth initiatives are expected to be enhanced by its mobility-enhancing technology portfolio
Avis’ competitor
Avis Budget Group Inc. (NASDAQ:CAR) has had a tough time from its competitor U-Haul, the largest do-it-yourself (DIY) equipment rental company in North America. U-Haul is a subsidiary of AMERCO (NASDAQ:UHAL). In addition to operating the lowest-cost truck rental company in the industry, AMERCO (NASDAQ:UHAL) also owns valuable real estate.
However, it is U-Haul that we are interested in. U-Haul rents trucks and trailers, sells moving and packaging supplies, and also refills propane tanks. The company has the largest network of dealers and the largest fleet of rental trucks and trailers in North America — by a wide margin. This gives it a tremendous cost advantage by way of economies of scale.
U-Haul maintains a 50% share of the DIY equipment-rental market, which is way higher than the next closest market share of 10% by Avis Budget Group Inc. (NASDAQ:CAR). It is interesting to note that truck rental accounts for only 6% of Avis’ performance and hence, Avis is gradually winding down this business, which will help U-Haul to increase its market share.
Final word
Hertz Global Holdings, Inc. (NYSE:HTZ) definitely presents a better growth story given its benefits from Dollar Thrifty’s acquisition, revenue from other initiatives like HERC and Donlen and mobility-enhancing technology portfolio.
Zain Abbas has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings, Inc. (NYSE:HTZ).
The article Which One Is Better: Hertz or Avis? originally appeared on Fool.com.
Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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