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People line up at the Avis rental car in Miami International Airport in Florida.
Joe Raedle / Getty Images
The car rental industry has become one of the hottest sectors of the stock market in recent times as investors take a more optimistic view of what one analyst has historically called a “dysfunctional oligopoly”.
Rental car prices have been high, as have used car prices, which helps companies when offloading their fleets. The prospect of a shortage of new cars until 2022 could mean that tough industry conditions will persist and allow high profitability to continue.
Avis Budget Group
(ticker: CAR) hit a new high on Friday and ended the session at $ 138.20, up $ 11.75, or 9.3%. The title has increased by more than 50% since September 15. Avis is now valued at $ 9.2 billion.
Hertz Global Holdings
(HTZZ), which emerged from bankruptcy on June 30, gained 25 cents on Friday to $ 26.25 and rose 35% last week. Hertz was encouraged by the news earlier this week that board member Mark Fields, a former CEO of Ford Motor, will become interim CEO. Hertz is valued at $ 12 billion. Barron wrote favorably on Hertz.
Hertz has said he wants to do a “reinvestment” by the end of the year with an investor roadshow and that these events could occur within the next month. This could raise Hertz’s profile with investors, as could a planned change in Hertz’s listing to the Nasdaq or NYSE from the Pink Sheets.
“What used to be a dysfunctional oligopoly with no pricing power is now a functional oligopoly with pricing power,” said Hamzah Mazari, analyst at Jefferies, who has a buy rating on Avis. “Historical valuation ranges may no longer be relevant. He doesn’t cover Hertz, who has virtually no analyst coverage. Avis, Hertz and the private company control over 90% of the US rental car market.
Mazari notes that Avis could generate $ 1.5 billion in earnings before interest, taxes, depreciation and amortization (Ebitda) this year, nearly double the pre-Covid levels. “People thought next year would be around $ 1 billion, but with the auto supply shortage it could be $ 1.4 billion,” Mazari said.
Rental cars are scarce, so it can be expensive to get one. A three-day rental of a compact car in New York around Christmas was recently estimated at $ 700.
“Now you have Mark Fields as CEO of Hertz, and the company has no net debt and is not looking for market share,” says Mazari. Hertz, he says, was once the “bad player” in the industry that sought market share at the expense of profits before it went bankrupt.
Mazari notes that Hertz predicted in bankruptcy court documents that it would not significantly increase its fleet in the coming years – a bullish sign.
Hertz had approximately 421,000 vehicles worldwide in its fleet at the end of the second quarter, of which 350,000 were in the United States. could change based on vehicle availability and other factors.
Enterprise has long been considered the best-managed company in the industry.
Mazari says car rental companies were trading no more than nine to 9.5 times annual EBITda. He thinks valuations could rise 11 to 11.5 times if investors believe the industry has changed for the better.
Write to Andrew Bary at [email protected]
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