Car Rentals Are Humming, but Investors Aren’t Riding
Call it an expensive fork in the road.
On one path are the stocks of the major car-rental companies, which have been pounded by investors for months now.
The industry, though, is headed down the other path: It’s enjoying flush times because the economy is robust, travel demand is high, and so consumers’ demand for rented cars is also strong.
Moreover, the car-rental firms say that they have continued nudging prices higher over the last several months, which is helping swell their profits and revenues, and that they have no intention of reverting to the bloody price wars of the ‘90s that saddled many of the companies with huge losses.
So what gives?
Wall Street’s perception of the car-rental sector’s outlook appears entirely different from that of the $18-billion U.S. industry. Fears of another price war in the car-rental sector have again permeated the stock market since early this year, making investors skittish about owning the stocks, analysts said.
“What happened was that Dollar Thrifty started not raising [prices] as much as the other guys,” and Alamo--a unit of AutoNation Inc.--and Budget Group Inc. in turn followed suit, said analyst Dean Gianoukos of J.P. Morgan Securities in New York.
“Although pricing is still very good [compared with recent years], the worry is that Hertz and Avis are losing market share and eventually are going to have to cut rates too,” he said. “People are bracing for that . . . and everybody’s exiting the stocks.”
Nonsense, said Dollar Thrifty executives.
“We’ve had the highest pricing [increases] of anyone in the fourth quarter and first quarter of this year, and our profit numbers are way up,” said its chief executive, Joseph Cappy. “How could somebody point the finger at us?”
Dollar Thrifty, which runs rental agencies under each of those names, raised average prices in the first quarter by 6.3% from a year earlier, said its chief financial officer, Steve Hildebrand.
Yet “there’s the perception that prices were not going up, when in fact if you talk to any car-rental company they’ll tell you that they had the best prices increases they’ve had in two years,” Hildebrand said.
Alamo likewise denied holding the line on prices. The company “has kept pace with the industry [price hikes] and in certain cases [in various markets] may well have led the pack,” said Alamo President Michael Going.
Consumers, meantime, aren’t feeling a sharp pinch either way. Average rental prices this year will edge up 3% to 5% for individuals and 2% to 3% for corporate accounts, about the same as last year, and that shouldn’t dampen demand, predicted Jon LeSage, research director for the consulting firm Abrams Travel Data Services in Long Beach.
This year should be “another year of full airplanes, a steady inflow of international visitors and American consumers willing to spend extra income on vacations,” he said.
Investors, though, aren’t convinced. Hertz’s stock has plummeted 46% in the last 12 months, while Avis’ has lost 42%. Budget Group’s stock has plunged 70% in the period, and shares of AutoNation--which also owns the National rental chain--have lost 32%. (AutoNation is planning to spin off its rental operations later this year.)
To be sure, it hasn’t helped the rental companies’ stocks that interest rates have been climbing, which can eat into the profits of a capital-intensive business like rental cars, nor that transportation stocks in general haven’t been atop investors’ wish lists for many months now. Fears of an economic slowdown, and a subsequent drop in travel, also have weighed on the stocks.
But in the executive suites of the car-rental firms, which put more than 55 million people on U.S. roads each year, there is utter frustration. Yet they also concede that the industry’s history is partly to blame.
Until three years ago, many of the car-rental firms were owned by the Big Three U.S. auto makers, which diverted huge numbers of cars to their rental fleets. Those swollen rental supplies prompted the rental agencies to slash prices to move cars off the lots and to grab market share.
But since then, several of the rental firms have become publicly held companies, so their executives are focused more on raising their earnings and their stock prices to keep investors happy. That’s a key reason they began lifting prices, with Hertz often leading the way.
And because the price hikes were modest and didn’t turn off travelers’ desire for rented cars, the agencies’ revenues and profits rose sharply, and their stocks rallied a year ago. But the party was short-lived.
“Wall Street is concerned that this leads to a price war,” said Lauren Babus, Hertz’s vice president for investor relations. “The reality is there will always be skirmishes in pricing because there are so many different markets and types of rates and cars,” but an overall price war is not expected, she said.
And investors’ fears might stem from the fact that the car-rental agencies are fairly new as publicly traded companies, she said. For now, though, both Hertz and Avis last month posted first-quarter results that not only included double-digit profit gains but also earnings that bested analysts’ expectations. Dollar Thrifty also posted its best first-quarter results ever, but AutoNation’s Alamo and National operations are losing money. (The industry’s biggest U.S. player, Enterprise Rent-a-Car Co., is privately owned.)
The rental agencies “have been holding their price increases pretty well after a period of not doing so at all,” analyst LeSage said. Yet the stock prices are stark evidence that, no matter what the companies say, investors fret “that they’ll go back to market-share battles and price wars.”
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Divided Road
After rallying last year, car-rental stocks have tumbled in recent months even though the agencies say their financial results and prices keep improving. Weekly closes:
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Friday closes:
Hertz: $33.31, up 31 cents
Avis: $20.06, up 75 cents
Dollar Thrifty: $20.56, up 63 cents
AutoNation: $9.31, down 6 cents
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Source: Bloomberg News
