Should BMW be in the Car-Rental Business?
Hertz Global Holdings (NYSE: HTZ) and Avis Budget Group (NASDAQ: CAR) have a dangerous new competitor. BMW (OTC: BMWY) has entered the car-rental business.
The German automaker has launched ReachNow; a combination car-rental and ridesharing app, in three U.S. markets; Seattle, Brooklyn, and Portland, Oregon. ReachNow offers short-term car rentals similar to Avis’s Zipcar, an Uber-type car service and one to five days of standard car rental.
The rental offerings are limited to BMW and Mini sedans and SUVs but the service looks scalable. It also seems competitive; the ReachNow website advertises rentals for a $15 a trip, 41¢ a mile and $80 day, and $50 a day rentals for the Memorial Day weekday holiday.
Is BMW now a Threat to Hertz and Avis-Budget?
The target markets for ReachNow are clearly urban hipsters and affluent professionals. It even has cars parked at some office buildings in Seattle. That’s a huge potential threat to both Hertz and Avis because it targets some of their best customers: business travelers.
ReachNow is positioning itself as a high-end car rental alternative by offering two prestige brands; BMW and Mini. Its chauffeur-driven cars even offer riders such amenities as chocolates and bottled water. Its website also mentions cost of a trip to the airport ($15) which sounds like a blatant effort to crash Hertz’s main business.
This comes at a bad time because there is circumstantial evidence that ride-hailing apps have damaged Hertz and Avis’s business. The accounting software company Certify analyzed expense reports for fourth quarter 2015, and found that more business travelers used ridesharing than rental cars, Bloomberg reported. Around 43% of business travelers expensed ridesharing, while only 40% rented a car.
It looks as if somebody at BMW noticed that Certify report and decided to capitalize on it. Hertz and Avis-Budget investors should take notice because BMW certainly has the resources to become a major player in the car-rental business if it desires.
BMW reported $204.75 billion in assets, $15.19 billion in cash and short-term investments, $4.18 billion in cash from financing, $8.089 billion in net income, and $3.956 billion in cash from operations on March 31, 2015, ycharts reported. The luxury-car maker also reported a market capitalization of $62.04 billion and an enterprise value of $151.23 billion on May 26, 2017.
Can Hertz and Avis-Budget Compete with BMW?
BMW’s resources make ReachNow a threat to car-rental companies. The nature of its business might also attract a lot of venture capital, some news reports indicate that Uber is valued at $70 billion.
That threat comes at a bad time for both Avis Budget and Hertz Global because their revenues are falling. During first quarter 2017, Avis’s revenues fell from $8.659 billion in December 2016, to $8.617 billion in March. Hertz’s revenues dropped from $10.70 billion to $10.67 billion the last quarter for which data is available at ycharts (third quarter 2016).
Hertz is in very sorry shape because its net income plummeted from $213 million in June 2016 to $18 million in September 2016. Avis’s net income is also dropping like a brick; it reported $271 million in income in March 2016, and $107 million a year later.
It looks as if Hertz and Avis-Budget might not have the resources to fend off a challenge from BMW. Avis-Budget reported a free cash flow of -$3.539 billion on March 31, 2017. Hertz reported a free cash flow of -$972 million on September 30, 2016.
Hertz also reported assets of $21.13 billion and cash and short-term investments of $1.43 billion on September 30, 2016. Avis-Budget had cash and short-term investments of $923 million and assets of $18.98 billion on March 31, 2017.
Will Hertz and Avis-Budget Survive?
The car-rental companies might be able to compete with BMW because they simply lack the resources. BMW is in the position to easily outspend them and use low-fares as a loss leader to attract business.
Hertz and Avis-Budget have some advantages including a greater selection of vehicles. They also offer many models BMW cannot; including pickup trucks and minivans. That enables Hertz and Avis to serve some customers who would not go near BMW such as singles who are moving and vacationing families.
Hertz and Avis-Budget might survive BMW and Reach Now, but what happens when General Motors (NYSE: GM), Ford (NYSE: F), Toyota (NYSE: TM), Volkswagen, Honda Motors (NYSE: HMC), Tesla Motors (NASDAQ: TSLA) and Fiat Chrysler (NYSE: FCAU) launch similar ventures? GM in particular would be a huge menace because it offers a wide array of vehicles including vans, minivans large SUVs, Cadillacs and pickup trucks.
General Motors is a Threat to Avis-Budget and Hertz
Those companies also have a lot of resources they can tap. General Motors reported cash and short-term investments of March 31, 2017, and Ford reported $39.99 billion on the same day. Toyota had even more money in the bank, $43.08 billion, on the same day.
General Motors is probably the biggest threat to Avis and Hertz, because it has launched a short-term car rental service called Maven that is similar to ReachNow. GM also owns a big piece of the ridesharing company Lyft and it bought the remains of Uber’s defunct competitor Sidecar. A major threat to Avis and Hertz would be Maven placing vans, Cadillacs and SUVs outside hotels to compete directly with them.
Other carmakers have not gone that far, but their leaders are certainly thinking of going into car-rental. Ford is spending $1 billion to develop autonomous vehicles for ride-sharing use and Elon Musk openly discussed a future in which nobody owned cars at a TED talk in Vancouver.
Are Avis-Budget and Hertz Acquisition Targets?
An intriguing possibility here is that Avis-Budget or Hertz will be acquired by an automaker. Both companies are real cheap right now, Hertz had a market capitalization of $831.66 million on June 1, 2017, and Avis had a market cap of $1.894 billion on the same day.
Buying a car rental company would be a smart move for either Ford or GM; because it would give them a readymade infrastructure for marketing, servicing and distributing short-term rentals. It would also get them into the most lucrative vehicle rental locations namely airports. So do not be surprised if either Avis-Budget or Hertz gets gobbled up by an automaker.
There is one certainty in this situation for stock pickers, auto companies are a far better investment than car-rental companies. Automakers have a bright future because of new technologies, car-rental companies face a brutal struggle for survival because their suppliers are about to become their biggest competitors.
