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Puttin' on the Hertz



August 13, 2013 – Comments (0) | RELATED TICKERS: HTZ , CAR

I've been renting cars a lot over the last year, and wanted to put some thoughts down regarding, in particular, HTZ.

HTZ acquired Dollar Thrifty last year and had to divest about 30 locations of a different subsidiary, but that consolidated the market to two giant players - HTZ/Dollar/Thrifty and Avis/Budget - and a few tiny players, Enterprise and a couple of really low-price barebones players you've never heard of.

Hertz was my first inclination - I joined up, both my AXP cards give me great discounts as well as AAA - and I've rented from them, a variety of vehicles, maybe 12 times over the last year.  Some of this was leisure, some business and got reimbursed.

I think what I'm most impressed with is technology and how they've levered it to get their business right, increasing employee productivity to about $330k per emp per annum.  Their fleet is highly utilized and I've been offered discounts in order to get vehicles from point A to point B where they know they're going to be needed/utilized.  Utilization rates are nearing 70%, unheard of to date for this industry, and with the Dollar Thrifty integration a giant fleet that was 50% utilized at best is now nearing this rate as well - indicating to me that the HTZ brand of technology is superior.

What this has meant is that HTZ generally has offered the vehicle I wanted - often when no other companies have had it - and I've been able to book it, no muss no fuss.  In fact, recently when an airline delayed me, my reservation expired after 24 hours - and they couldn't rebook me when I got to my destination because they had no cars available.  Personally annoying - but it meant that their utilization that Friday was 100%!  The Avis counter next to me had plenty of vehicles available.

Day before yesterday I waited in a long - nearly 30 minutes - line at SFO.  Every other counter had no-wait service, but every traveler wanted HTZ.  The HTZ counter was 5 times the size of the Avis and Budget counters and was still generating this huge line.  People who just needed no frills rentals were directed to video kiosks - I wanted to try for a discount one-way, as I'd received before, and was not able to score one this time.

Most interesting to me is, Hertz's entry into retail used car sales.  They are getting into the business of CarMax and F and GM, but unlike those companies they know perfectly well what their supply is going to be year-to-year - and their customers generally know exactly what they want to buy, (often equipment packages not made easily available by the car manufacturers,) because those customers have rented that model of car before.  I was able to find the exact same vehicle I'd rented 10 months ago - I liked it so much I noted down the VIN - and nearly bought it online before I came to my senses (a FlexFuel Ford Expedition, if you're interested.  Love the sure-footed independent rear suspension, the gas mileage of 21 highway, and the folddown seats.)  Many people who actually need a new-used car will not have to come to their senses and will note the competitive pricing and competitive warranty, and will go ahead and buy.  What used to be a liability to Hertz - offloading their fleet annually - is suddenly generating retail-type margins, and that's pretty exciting right now as I believe there's a lot of pent-up demand for autos.

Here's potential downside: HTZ is super-highly levered.  On a market cap of 9.9B, HTZ has $15B of longterm debt.  Upside is a lot of this, especially the older, higher-rate debt, is callable and they see rates staying flat until late 2014; a lot of this debt, at least $5B, originated in the last couple years' low rate environment and their CFO sounds like a real financial wizard on the call transcripts I've read.

Rental car is a capex-intensive business by nature and I think HTZ has taken a risk here by levering up - their debt/equity is 8 and their margins, while positive for the last year, are razor-thin.  By comparison, however, Avis-Budget's debt/equity is 15+, and I don't think their tech is as good as Hertz's is, and I don't think they're positioned to be able to do more capex to improve it - which means HTZ should continue kicking bumper and taking names - taking market share, really - for the foreseeable future.  I also think levering up and acquiring during the lowest-rate environment we're likely to see for decades was a fairly wise move, although as everyone points out it could bite them on the bumper if we hit more soft patches in the years ahead.

It doesn't look that way, though.  Europe is recovering, HTZ's Europe numbers are recovering like gangbusters, and the US business is strong.  HTZ is also prepared to roll out 70,000 off-airport self-serve vehicles in the next year - you listening, ZipCar?  (ZipCar's owned by Avis Budget, btw, and they may take a big walloping when HTZ decides to eat a piece of that lunch.)

I often buy, and preach, rock-solid fortress balance sheets and yields when I am talking about buying shares.  But I think it's time to start adding a little risk into my portfolio - you hear that, guys?  I'm capitulating - and I'm into HTZ long here, today. 

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