Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Should Avis Budget be Afraid of Uber?

The situation at Avis Budget Group (NYSE: CAR) shows us why investors need to pay attention to earnings reports than the news. A lot of chicken littles have been dumping rental car stocks lately because of a news report showing that certain travelers prefer Uber to rental cars.

For the first time; more business travelers listed ride-hailing apps such as Uber and Lyft than rental cars on their expense reports, accounting software firm Certify reported. Certify found that 43% of business travelers used networked transportation solutions; and only 40% rented a car in fourth quarter 2015, Bloomberg reported.

This is the first time that we have some hard data proving the theory that Uber and Lyft are a threat to car-rental companies. Avis and its competitors obviously need to be worried about ride-hailing apps but what about investors?

Uber is not Affecting Avis Yet

The interesting aspect to all this from a value investors’ perspective is that the rise of Uber has had little or no effect upon Avis’s revenue. Intriguingly, Avis’s revenues actually rose slightly in 2015 in the face of the Uber onslaught.

Avis began 2015 with revenues of $8.485 billion in December 2014, and ended the year with $8.502 billion in revenues. The shift to Uber does not seem to have halted Avis-Budget’s revenue growth. Although the rate of growth was lower than in 2014. Avis’s revenues grew by $546 million in 2014, rising from $7.938 billion at the end of 2013 to $8.485 billion at the beginning of 2015, yet they only rose by $17 million in 2015.


Avis did better than its arch rival Hertz Global Holdings (NYSE: HTZ); which suffered a revenue drop in 2015. Hertz began the year with $11.05 billion in revenue and finished with $10.54 billion, a drop of $510 million. It looks as if Hertz is struggling to maintain market share while Avis is holding its own.

This means that Avis-Budget’s financial numbers for first quarter 2016 are going to be a real interesting read. The question investors will want to know; is has Uber cut into its bottom line yet? Will Avis be able to reverse the revenue drop and avoid the decline at Hertz?

Is Avis Making Money?

The big question value investors will want answered will be is Avis making money? The interesting answer to that is yes, but there is a little evidence that Uber could be affecting Avis’s income.

Avis did display impressive income growth in 2015, it began the year with a net income of $245 million and finished with one of $313 million. Avis was able to keep money rolling in even with Uber on the prowl. Yet the company did have a some struggles, it reported a negative profit margin of -.26% and a negative free cash flow of -$1.693 billion.


More importantly, Avis was able to maintain quite a bit of float in the face of ride sharing apps. It began the year with $2.579 billion in cash from operations and finished with $2.584 billion in cash from operations. The amount of cash Avis took in was down slightly; which indicates Uber is affecting its operations slightly, a drop of around $50 million.

More worrying was the cash and short-term investments figure which shows us that Avis Budget has less float. Avis started 2014 with $624 million in the bank and finished with $452 million in short-term investments and cash. It looks as if Avis had to dip into its piggy bank to cover some of the cost operations which is troubling.

Is Avis Uber Proof?

These figures show us that Uber might be hurting Avis-Budget’s business more than we realize. Ride-sharing apps are having little effect on the actual number of car rentals, but they are cutting into the profits and cash flow.

Avis reported a profit margin of 1.22% in December 2014 that fell to -.26% in December 2015. It looks as if car rental might no longer be a profitable business because of the Uber competition. Hertz finished 2015 with a profit of 2.9% meaning that its business model could be more viable.

So what can we learn from all this, an obvious conclusion is that auto-rental is a low margin business. The rental companies do not generate much float, so they are vulnerable to any sort of serious competition.

Another is that Uber could be taking the rental companies’ highest value customers, the ones who rent the most expensive vehicles. The person most likely to use Uber is the account executive; who normally rents a Mercedes or a Cadillac. The customers least likely to use Uber are the vacationing families who rent minivans. Avis-Budget’s Zip Car subsidiary could be even more vulnerable to Uber; because ridesharing is more convenient than walking out to a car on the street.

That means the car-rental companies still have plenty of customers out there but those customers could be of lower value. Hertz and Avis-Budget will make less money from the customers, but their expenses could be just as high.

Rental companies will have to adjust their business models, by offering fewer sedans and more minivans. They might also have to abandon some locations; such as those at airports or high-end hotels.

More importantly, the rental companies will have to start looking for new sources of revenue. A major one could be renting or leasing vehicles to Uber drivers.


Hertz and Avis Budget are Acquisition Targets

Naturally, investors will want to know if Avis Budget; which was trading at $23.98 a share on April 26, 2016, is a good buy. I would say no because it offers no dividend. I also  expect the share price of Avis Budget to collapse, perhaps not to the level of Hertz, which was trading at $9.035 a share on April 26, 2016.

So what is the most likely future for car-rental companies? I would say as acquisition targets, because they are so cheap. Hertz had a market cap of $3.83 billion and an enterprise value of $19.14 billion, and Avis had a market cap of $2.329 billion and an enterprise value of $14.2 billion on April 26, 2016.

My guess is somebody will snap these companies up. A likely buyer is Berkshire Hathaway (NYSE: BRK.B) because Warren Buffett loves auto-related companies. Others include Ford (NYSE: F); which had $62.27 billion in cash and short-term investments on December 31, 2016. Buying Hertz or Avis-Budget could help Ford preserve a distribution channel. A car-rental company could also help Ford expand its own networked transportation efforts.

Car-rental companies will survive but their business will be much diminished and less profitable. That means they may have to join forces with larger and richer organizations just to stay in business.