Sunday, 19 May 2013

Hertz rent to buy?

Hertz (HTZ) is famous for its car rentals and slogan we're Hertz, they're not. You have to be good to live up to that standard and HTZ has delivered as the world's largest airport car rental service. HTZ operates from 10,460 locations in 150 countries with around 750,000 cars. 

Hertz-Ford=Profits?
Car rental companies like HTZ used to be owned by the auto makers. For example Ford used to own HTZ and used HTZ as a dumping ground for their cars. Since the sale by Ford in 2005 HTZ has purchased less Ford cars from 40% to 13% of overall purchases last year. Imagine how much overcapacity the airline industry would have if plane manufacturers owned airlines like Qantas and kept selling them planes they didn't order!



1+1=3
Amazingly HTZ was recently allowed to buy their fourth largest competitor in the market. The acquisition of the Dollar and Thrifty brands was a prolonged three year affair with competing bids from Avis. Three companies now have 95% market share of the rental market. The industry has not only consolidated but come under more business oriented management. 

HTZ management estimates there to be $300m in revenue synergies and $300m in cost synergies. The acquisition will help HTZ utilise its car fleet more effectively. HTZ is a premium corporate brand its cars tend to be utilisted throughout the week while Dollar and Thrify are leisure focused and tend to peak on the weekend. There will be plenty of revenue opportunities to maximise utlisation and reduce costs. Though this does come at a cost HTZ has taken on quite a bit of corporate debt it plans to use its cash flows to get to an investment grade rating as soon as possible.



Source: HTZ investor day

Technology = The world (ex-airports)

According to IBISWorld HTZ has overall US marketshare of 24%, Enterprise (private) has 39% and Avis 18.5% marketshare. The market in airports is extremely competitive with HTZ being the leader. One area HTZ has somewhat neglected is the market ex-airports where they have 12% share and Enterprise is the dominant leader. Previously off airport had been too costly to manage but with technology HTZ believes they can profitability compete in this segment. Technology such as kiosks and mobile devices have allowed HTZ to offer 24/7 service and the ability to rent by hour for $10-12 with a full tank of gas.

On demand booking in 45 seconds
When you sign up for the program hertzondemand.com will send you a card/FOB. Customers can book on the phone or through their app which lets you know where the car is located. Swipe the card and the keys are inside and swipe when finished. So click, swipe and drive maybe even I can use it!




Source: HTZ investor day

HTZ plans to have cars within a five minute walk of nearly anywhere in the US within 18 months. HTZ has already partnered with retailers to rent trucks, an example being the home hardware operator Lowes where customers can hire a ute/van/truck when making large purchases. The use of kiosks and partnering with retailers increases the market opportunity. HTZ also offers their own version of the ipad Neverlost which will provide GPS and can put you in touch with a real person.

Oligopoly?
The industry has consolidated from 8 to 3 over the past decade. This consolidation of the market has given management the confidence to give earnings guidance to 2015 of up to $3.30 per share or 35% compounded earnings growth over the next few years. Management believes this guidance to be conservative as they did not assume much in the way of price increases and hardly any GDP growth, the forecasts are just based on internal HTZ initiatives. 

Pricing in the industry has fallen over the past three years and there are signs that competitors are beginning to implement increases.


Worldwide rental rate revenue per transaction 
201020112012
 $            43.14 $           41.33 $           40.01
-4.2%-3.2%


Given the changed market structure of the industry (3 players with 95% share) and the fact prices have retreated while the economy has recovered there seems to be a real possibility that prices will likely increase. Book a rental car while its still cheap! 

Jason


Disclosure: Decisive has a long position in HTZ stock
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