Zipcar (proposed symbol ZIP) is scheduling a $125 million IPO with a market capitalization of $579 million at a price range mid-point of $15 for Thursday, April 14, 2011. Full IPO Calendar lists 7 other IPOs for this week.
CONCLUSION -- On a short-term basis at 30% of the market capitalization of Avis Budget (NASDAQ:CAR) and Dollar Thrifty (NYSE:DTG), car sharing Zipcar is an interesting speculation, if it can increase market share and reduce the operating expense to revenue ratio. ZIP reported EBITDA of $3.6 million for both the September and December 2010 quarters on respective quarterly revenues of $55 million and $52 million.
On a longer basis, ZIP appears vulnerable to competition from better-known car rental brands.
SUMMARY-- Zipcar has 550,000 members and 8,000 vehicles in the United States, Canada, and the United Kingdom. Sales for ZIP were up 40% for 2010 versus 2009, but the operating loss expense ratio remained at -4%. Averaging the last two quarters ended December 2010 ZIP showed operating income of $126,000.
Based on the last six quarters there appears to be little room for bottom line profits in ZIP’s current business model. ZIP did manage to squeak out a marginal operating profit only in the December 2010 quarter. It appears that ZIP ratcheted expenses down enough to show the only quarterly operating profit in history, $346,000, just before the IPO. December 2010 sales seasonally declined 4.8% from the September 2010 quarter, and expenses decreased 6%.
For the last six quarters, the operating expenses as a percent of top-line revenue were 101.3%, 103.7%, 113.9%,106.3%,100.4%,99.4%. ZIP has a 100% track record in generating bottom line losses since its inception, and has accumulated $65.5 million in losses.
ZIP's valuation needs to be considered within context of the car rental industry.
CAR RENTAL INDUSTRY & VALUATION
Bull market in car rental stocks: In the last six months, the three major car rental companies increased in value an average of 59%: Hertz (NYSE:HTZ) was up 66%, Avis Budget (CAR)was up 66%, and Dollar Thrifty (DTG) was up 43%.
Car rental companies have very low profit margins, very high operating expense to top line revenue ratios, and relatively low P/E multiples. On average the three companies had an operating expense to total revenue ratio of 0.9%: Hertz -.2%, Avis Budget 1.4%, and Dollar Thrifty 1.6. ZIP’s ratio was –4% for calendar 2010.
For calendar 2010, Hertz showed a loss. The other two were profitable with P/E ratios for the 12 months ending December 2011of 36 for Avis Budget and 15 for Dollar Thrifty.
In the context of the car rental industry, ZIP appears capable of generating much more percentage top line revenue growth than Hertz (HTZ), Avis Budget (CAR) and Dollar Thrifty (DTG). For example, ZIP identified more than 100 global major metropolitan areas and hundreds of universities as attractive markets for car sharing. Today, ZIP operates in only in 14 of these major metropolitan areas.
However, because ZIP's proposed market capitalization (at the price range mid-point) is 30% of CAR’s and DTG’s, it seems likely that CAR, DTG and HTZ are all planning to compete with ZIP.
ZIP VALUATION -- On a price to sales comparison ZIP is at a premium: 3.1 compared to an average of .8 for the other three car rental companies. On a price to book comparison, ZIP is at a discount: 2.9 compared to an average of 3.8 for the other three car rental companies.
ZIP and HTZ lost money in 2010, while CAR and DTG were both profitable.
CONCLUSION -- On a short-term basis at 30% of the market capitalization of CAR and DTG, Zipcar might be an interesting speculation if it can increase market share and reduce the operating expense to revenue ratio. On a longer basis ZIP appears vulnerable to competition from the better known car rental brands.
BUSINESS -- ZIP markets itself as a ‘car sharing ‘ option. In fact it’s an hourly car rental company. ZIP targets large, densely populated markets with high parking costs and strong public transportation systems.
ZIP operates its membership-based business in 14 major metropolitan areas and on more than 230 college campuses in the United States, Canada and the United Kingdom. ZIP has incurred a operating deficit of $65.5 million and has generated consistent operating and net losses.
MARKET -- According to Frost & Sullivan, revenue from car sharing programs in North America will increase to $3.3 billion in 2016, up from $253 million in 2009. Frost & Sullivan expects revenue from car sharing programs in Europe to increase to €2.6 billion in 2016, up from €220 million in 2009.
ZIP conducted a study of the global car sharing market in which ZIP utilized third-party data collection and technical support and analysis. Based upon the study, ZIP believes that the Frost & Sullivan market forecasts are more likely achievable by 2020. ZIP also believes, based on the study, that revenue from car sharing programs in Asia Pacific will be approximately $4 billion on a comparable timeframe.
GROWTH PLAN -- ZIP identified more than 100 global major metropolitan areas and hundreds of universities as attractive markets for car sharing. Today, ZIP operates in only in 14 of these major metropolitan areas
MARKET BECOMING INCREASINGLY COMPETITIVE
Note: ZIP has no room in its income statement for price competition because operating expenses are so high.
Currently, primary competitors in North America are traditional rental car companies that have recently begun operating car sharing services, which generally have greater name recognition among ZIP’s target members and greater financial, technical and marketing resources.
Secondary competitors include for-profit and not-for-profit companies which provide car sharing services in specific neighborhoods, communities or cities. These secondary competitors may increase the number of vehicles in their fleets or enhance the vehicle offerings in their existing fleets to be more competitive, and additional competitors may enter ZIP’s markets in North America.
ZIP believes that price is one of the primary competitive factors in its market and pricing is very transparent.
SEASONALITY -- ZIP generally experience some effects of seasonality due to increases in travel during the summer months and holidays such as Memorial Day, Thanksgiving and Christmas. Accordingly, the number of Zipcar reservations and associated revenue have generally increased at a higher rate during those periods. Revenue fluctuates due to inclement weather conditions, such as snow or rain storms. In the future this seasonality may cause fluctuations in ZIP financial results.
2-3 YEAR CAR HOLDING PERIOD – DEPRECIATON RISK -- Average holding period for a Zipcar is two to three years. ZIP carries all the risk that the market value of a vehicle at the time of its disposition will be less than its estimated residual value at such time
METROPOLITAN AREA RISK -- The majority of members are located in major metropolitan areas such as Boston, New York City, Washington, D.C., London and the San Francisco Bay Area. ZIP’s markets are clearly visible to current and potential competitors.
FIXED COST RISK -- Because many expenses are fixed, ZIP may not be able to limit losses if ZIP fails to achieve forecasted revenue.
PARKING AVAILABILITY RISK -- ZIP’s growth depends on its ability to obtain and maintain a sufficient number of parking locations that are convenient to members.
STOCK OVERHANG RISK -- Holders of an aggregate of approximately 30.1 million shares of ZIP’s common stock as of March 15, 2011, will have rights, subject to some conditions and any applicable lock-up agreements, to require ZIP to file registration statements covering their shares and to include their shares in registration statements that ZIP may for themselves or other stockholders.
ZIP intends to register all shares of common stock that it may issue under equity incentive plans, including 1,593,167 shares reserved for future issuance under its equity incentive plans as of March 15, 2011.
As of March 15, 2011, there were 5,237,375 shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act.
SHAREHOLDERS -- Post IPO ZIP will be 34% owned by venture capital firms
USE OF PROCEEDS
- $89mm from sale of 6.67mm shares. Shareholders intend to sell 1.67mm shares
- $48mm to repay debt at interest rates from 9% floating to 16.8%
- Balance for business expansion working capital and other general corporate purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.