Rental Cars: Analyzing The Biggest And The Smallest Companies

Includes: EGCT, HTZ
by: JoeNatural

Being a person that frequently travels, I'm always in need of a rental car. Just this past weekend, I traveled to Cincinnati on business and in using Hotwire as I always do, I was able to rent a very nice full-sized car from Alamo for just $10.50 a day plus tax and of course, rental car taxes many times exceed the actual rental amount depending on what state you fly to. In this case, my total charge for three days including tax was $61.93, so obviously I was pleased and just happy I wasn't flying to California where I would have been taxed like a rich man from France.

Rental car companies are unfortunately always the target of state and local governments with regard to generating much needed revenue from taxes and if it weren't for the target on their backs, profits would be sky high, as rates could be raised considerably from where they are. Needless to say as in the case above, I've always been amazed at how these rental car companies can make a profit when they're only generating $10.50 a day from folks like myself, especially when you always get unlimited miles. This can easily be answered.

Not every car renter is a savvy business traveler that truly understands the business. Those that don't know the ropes will almost always be financially penalized. For starters, car renters pay millions and millions each year for unnecessary insurance at rental car counters when in fact their own auto insurance policy back home will most often cover damages from rentals. Heck, I only have a liability policy from Farmers for my own vehicles, yet my policy states that I'm covered whenever I rent a car in the USA. Many people have credit cards whereby they're covered for rental cars by the credit card company, yet they aren't even aware of this. Secondly, pre-paying for fuel in advance at the counter is a bad idea, as I can recall more times than not whereby I would have basically been putting extra gas in the tank for the car rental company to sell to the next guy. Don't be lazy, fill the tank yourself and return the car when you're supposed to.

In managing several stock portfolios and in always trying to get the best return possible, I not only analyze the larger, more stable companies in a particular sector, I take a look at what's up and coming that many may have casually overlooked. Obviously what comes with the new kids on the block is more risk, so doing as much homework as possible is a must, especially when the money you're managing isn't yours.

I thought it would interesting in this case to take a look under the hood at the largest publicly traded rental car company in the world and also the smallest.

Hertz Global Holdings, Inc. (NYSE:HTZ) is a company that everyone recognizes as a premium brand along with their main competitor, Avis Budget Group, Inc. (NASDAQ:CAR). What everyone doesn't recognize is that Hertz not only rents cars, they rent many types of equipment ranging from massive earthmoving machines all the way down to small tools. The company's been in business since 1918 and employs nearly 25,000 people across the globe.

Just a month ago on August 26th, Hertz announced an agreement to buy Dollar Thrifty Automotive Group, Inc. (NYSE:DTG) for $87.50 a share after having gone back and forth with regard to a potential buyout since 2010. In acquiring the mid-tier car rental company, Hertz had to agree to sell its Advantage brand in order to appease regulators' concern that Hertz would become too big. With DTG under its belt, Hertz will now expand its global presence with a greater discount model attached along with hopeful expansion of travel partnerships.

What I find particularly appealing is that the average EPS estimate for this year from the seven analysts following the company is $1.33 and $1.55 next year, a very nice 17% year over year increase for a company with a large $5.77 billion dollar market cap. The company itself stated last month that they intend to grow revenues 7% to 8% annually over the next three years while also driving cost efficiency and increasing margins from rapidly expanding their presence in the "off-airport" segment of the industry, a segment where Hertz has plenty of room to grow since their current market share is only 12%.

Surprisingly, 12% of the float is short, but when applying the above metrics to the equation, I think it only adds fuel to the fire unless of course we see a significant global slowdown. All in all, I think Hertz deserves a higher P/E than the current 10.32 based on this year's earnings and next year's EPS forecast growth of 17%, not to mention the premium the stock deserves with the company operating a premium brand.

Ecologic Transportation, Inc. (OTCQB:EGCT) is the smallest publicly traded rental car company I could find with a current market cap of $9 million dollars. At first glance of the most recently filed 10Q, I saw nothing fundamentally that really told me why the one-year chart (below) looked so good, as the company had an accumulated deficit of $7.5 million and a business that was floundering at best, but then I stumbled across this August 30th interview that opened my eyes and made me realize just why the company's stock has held up well over the past year.

EGCT 1 Year Chart

EGCT's Chairman, Ed Withrow, brought in long time friend Bill Nesbitt a year ago to assume the role of CEO and help build a car rental brand with a single focus on environmentally friendly cars, the first of its kind.

So what's the big deal about Bill Nesbitt ? Well Nesbitt once started a small rental car company from nothing that eventually grew its revenues to $1.3 billion. That company ? Alamo Rent A Car, one of the most recognized rental car brands today and a company that Nesbitt eventually sold to Florida billionaire Wayne Huizenga.

EGCT's strategy is to grow through acquisitions that are highly accretive and executed with debt and little dilution. On August 13th, EGCT made its first move in announcing a letter of intent to acquire Ace Rent A Car, Inc., a company with over 200 locations that generated $69 million in revenue in its latest fiscal year. EGCT stated just a month later that two investment banking agreements had been signed with one of the oldest investment banking firms in the U.S. and if certain conditions are met, acquisition financing up to $20 million via debt will be granted and the same goes for the second agreement for up to $30 million for a public offering, assuming a successful acquisition of Ace. Nesbitt also stated that an aggressive acquisition program has been launched and due diligence has been initiated on several other acquisition targets.

In reaching out to EGCT's Chairman, Ed Withrow told me he won't sell a single share of his own stock until the company is eventually bought out and that current plans call for growing revenues up to the $350 million area in a few short years. In asking what the share structure would look like after the acquisition of Ace and subsequent strategic moves, Withrow stated that the outstanding share count would be no more than 40 to 45 million.

This is a story worth watching and if Ecologic is successful with its "Pure Green" strategy, it's my opinion that the company will find itself becoming a part of the consolidation that seems to be rampant throughout the sector. The closing of the Ace Rent A Car acquisition will be key and will send a strong signal that Ecologic is for real and a new kid on the block. It also certainly doesn't hurt that the captain of the ship has been a part of some very large deals in the past with very large players.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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