Car-Rental Stocks Get Twin-Turbos
BOSTON (TheStreet) -- A takeover battle between Hertz (HTZ) - Get Report and Avis (CAR) - Get Report for Dollar Thrifty (DTG) has taken investors on a joy ride this year, and that may continue as rising demand for cheap rentals and a rebound in business travel are driving an earnings rebound.
Shares of Hertz, the largest publicly traded company in the business with a market value of $5.1 billion, have jumped 44% over the past three months in the wake of its failed bid for Dollar Thrifty, while those of smaller rival Avis, which has a $1.57 billion bid for Dollar Thrifty awaiting government approval, are up 46%. The
Standard & Poor's 500 Index
is up 13%.
Dollar Thrifty's shares, which have risen 79% this year as the company has been in play, have slipped 2.4% in the past three months as investors fret about the Avis deal. Dollar Thrifty is known for its cheap car-rental offerings and was one of the only auto-rental firms to make money last year.
The Avis-Dollar Thrifty deal, which was expected to have been approved by year-end, is being held up by the Federal Trade Commission (FTC), which has yet to give it anti-trust clearance. It's under scrutiny because the merger would give Avis a dominant position in the low-cost car-rental sector. It locked up a large segment of that business when it acquired then-bankrupt Budget Car Rental in 2002. Avis recently said it has given the FTC "millions of pages of documents" for its review.
Avis and Dollar Thrifty, with market values of $1.3 billion each, say they have agreed to work together to get federal approval before signing a merger agreement, and that they expect a ruling from the FTC in the first quarter.
Avis also has said it faces a challenge in financing its takeover of Dollar Thrifty, but it may have remedied that. At the end of October, it shuffled $700 million of its debt and increased its borrowing capacity by $100 million. And it sold $200 million in bonds Nov. 15 to help fund the deal.
The bidding battle for Dollar Thrifty between Hertz and Avis helped industry share prices across the board, so it raises the question about what will happen to those valuations if the Dollar Thrifty deal unravels.
But in its favor, the car-rental business is on the rebound after a tough past few years of steep declines in air travel due to business travel cutbacks and terrorism fears clipped company earnings.
Leading the recovery is growth in revenue from cheap, off-airport rentals, not the industry's traditional bread-and butter of high-margin airport rentals to business travelers. But there are signs of recovery in the business travel segment as well.
The low-cost rentals appeal to budget travelers and local businesses and, although they're a lower-margin business than airport rentals are, they tend to last longer. It's a $10 billion market opportunity that is growing rapidly, Hertz says.
The growth in both business segments is showing up in third-quarter results.
Hertz reported last month that its third-quarter revenue jumped almost 9%, and earnings per share more than doubled due to reduced costs and increased demand, especially from budget-conscious renters. It also hiked its previous 2010 earnings outlook by 7.9%.
Hertz has been expanding its own low-cost brand, Advantage Rent-a-Car, by adding 60 off-airport locations. "Our revenue continues to expand at a double-digit rate in the off-airport market, and we are increasing our investment to meet anticipated demand," Hertz CEO Mark Frissora has said.
Goldman Sachs
(GS) - Get Report
gave Hertz a "buy" rating Nov. 19.
Dollar Thrifty CEO Scott Thompson said on a conference call with analysts Nov. 2 that "we're cautious but fairly optimistic that the travel market will be coming back -- although coming back slowly -- but will certainly be positive for the foreseeable future." Dollar Thrifty said its third quarter was the best quarterly performance in the company's 60-year history, with earnings per share up 26%, while revenue rose just 1%.
Avis also had a strong third quarter, as earnings per share jumped 35%. The company expects its vehicle-rental rate will continue to rise through year-end.
The biggest car-rental company in the U.S. is privately held Enterprise Holdings, the parent company of Enterprise Rent-a-Car, National Car Rental, Alamo Rent-A-Car and National Car Rental.
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