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 $5.99 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.
How Avis-Budget can Cash in on Coronavirus with Zipcar
To elaborate, Zipcar places vehicles on streets and in parking lots, that people can rent for short periods of time. In fact, you can rent a Zipcar for as little as little as 15 minutes.
Hence, people could use Zipcar vehicles for errands and short-trips that could normally call an Uber or ride a bus, subway, or light rail for. In the Coronavirus age, Zipcar offers the ability to move around town with little human contact or exposure to COVID-19.
For example, a New Yorker could use Zipcar for a run to Costco (NYSE: COST). Significantly, Zipcar has many vehicles in hard-hit cities such as Boston and New York.
One obvious coronavirus strategy for Avis-Budget is to convert many of the vehicles in its airport and other rental facilities into Zipcar rentals. Hence, Avis-Budget could still make money from its fleet with most of the airliners grounded.
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.