We all know that coronavirus will wreak havoc on transportation stocks such as airlines and ride-share operators. But what about car-hire or auto rental companies such as the Avis-Budget Group (NASDAQ: CAR) and Hertz (NYSE: HTZ)?
The massive drop in airline travel and the freeze on vacations will hurt car rental companies. However, there could be some ways Avis-Budget or Hertz could make money during a pandemic.
First, unlike airlines Avis-Budget and Hertz operate vehicles, they can sell to the public. Thus, these organizations can still generate a little cash with auto sales.
Second, some travelers will drive rental cars instead of taking a plane or train. After all, maintaining social distance is easy when you are alone in the car. However, maintaining social distance is tough on a train, a plane, or the bus. Hence, some people who normally fly or take a train could drive a rental car out of fear of COVID-19.
Down Go the Car Rental stocks
Mr. Market, however, has little faith in car-rental stocks. Hertz Global Holdings’ (NYSE: HTZ) share price fell from $12.11 on 4 March 2020 to $4.79 on 3 April 2020. Yet Hertz rose to $6.00 on 8 April 2020.
Similarly, Avis (NASDAQ: CAR) shares fell from $30.55 on 4 March 2020 to $10.58 on 3 April 2020, but rose to $14.38 on 8 April 2020. Hence, each of the car rental giants lost two-thirds of its value in a month. That will pique the interest of value investors.
Remember, these companies have large infrastructures and fleets of vehicles. In addition, I think Avis-Budget is in a good position to cash in on declining car ownership with its short-term car rental or car sharing service Zipcar.
What Future Value Does Avis Budget Have?
Beyond Zipcar, Avis-Budget (NASDAQ: CAR) is participating in Waymo’s self-driving care experiments in the Phoenix area and other regions.
To explain, Waymo is Alphabet’s (NASDAQ: GOOG) self-driving car experiment. The Avis-Budget group is servicing the Fiat-Chrysler (NYSE: FCAU) minivans, Waymo is using to test its autonomous vehicle technology. Thus, Avis-Budget has experience with autonomous vehicles.
I think self-driving short-term rentals or rideshares are Avis-Budget’s future. In the future, you will order a vehicle through Avis-Budget’s app. The vehicle will leave the Avis-Budget office, drive to your location on its own and pick you up. Once the ride is over, the vehicle returns to the Avis-Budget location.
Short-term car rentals limit an obvious advantage; no human contact in future epidemics. Additionally, the Avis-Budget van could make contactless deliveries by hauling groceries to your house. At the house you could take the groceries from the van or a robot could carry the order to you. Ford (NYSE: F) and Agility Robotics are testing such a robot.
What Present Value Does Avis-Budget Have?
Last quarter, the Avis-Budget Group (NASDAQ: CAR) reported growing revenues and an impressive gross profit.
In detail, Stockrow estimates Avis-Budget’s revenues grew at a rate of 5.46% in the quarter ending on 31 December 2019. Impressively, Avis-Budget earned a gross profit of $998 million on quarterly revenues of $2.162 billion.
In contrast, Avis-Budget reported a common net income of $142 million and an operating income of just $36 million for the same quarter. Meanwhile, Avis-Budget reported an operating cash flow of $655 million, an investing cash flow of $286 million, and an ending cash flow of $192 million for the same quarter.
Moreover, Avis-Budget finished 2019 with $696 million in cash and short-term investments and total assets of $23.126 billion. Yet Mr. Market was paying $11.68 a share for CAR on 6 April 2020.
However, Avis-Budget is a questionable stock for ordinary investors because it pays no dividend. Yet I think Avis Budget offers a high margin of safety for such a cheap stock because of the low price.
What Value Does Hertz Have?
Comparatively, Hertz Global Holdings Inc. (HTZ) was cheap at $5.99 a share on 8 April 2020. However, I think Hertz has less value than Avis.
In particular, Hertz is less active in short-term rentals, but the company has shown some interest in self-driving vehicles. However, Hertz’s efforts are lower profile and Hertz has avoided association with industry leaders such as Waymo.
Currently, Hertz’s money-making potential resembles Avis-Budget’s. For instance, Hertz reported making a gross profit of $985 million on quarterly revenues of $2.325 billion on 31 December 2019.
Moreover, Hertz reported a quarterly operating income of $68 million and a common net loss of -$118 million on the same day. Additionally, Hertz reported an operating cash flow of $667 million, an investing cash flow of $1.067 billion, and an ending cash flow of $665 million for the last quarter of 2019.
Finally, Hertz had cash and short-term investments of $1.36 billion and assets of $24.627 billion on 31 December 2019. Thus, Hertz offers a lot of value for a low share price.
Similarly to Avis-Budget, Hertz pays no dividend. However, the lack of dividend shows Hertz is reinvesting its cash in the company.
Are Car Rentals a Value Investment?
If you are seeking a cheap value investment for the Coronavirus age, hire vehicle companies could be a good choice.
The car-rental stocks are cheap but they have a history of making money and a lot of resources management could adapt to profit from pandemics. Avis-Budget, for example, could deploy huge fleets of Zipcars to provide short-term transport in cities.
Thus, anybody seeking bargains in today’s stock markets needs to explore the world of rental cars.
Originally published at https://marketmadhouse.com on April 8, 2020.