2017-08-16 / Business News

Car rental company stock prices crushed by app-driven services, high debt

MONEY & INVESTING

Probably the greatest aspect of financial markets — and the most frustrating from an investor’s perspective — is that they are efficient. When a company is doing well, its stock goes higher. When it is struggling, its stock price immediately reflects that. This is problematic for investors because they want to buy great companies at a low price and sell their struggling investments at a higher price.

So why would an investor buy a stock when it looks like everything that could go wrong has gone wrong and the future looks even worse? This is the dilemma facing potential investors in the publicly trading car rental companies in the U.S.

What headwinds is this sector facing and should investors add these stocks to their portfolios?

The first problem facing the car rental companies is that more and more of their business is being taken away by companies like Uber and Lyft. Customers flying into a city are choosing not to take the time to take a shuttle to a rental counter, fill out stacks of paperwork and then choose a car. Instead, they are enjoying the convenience of tapping on their phone and being on their way as soon as they pick up their bags. This has depressed revenues and the demand for rental cars across the country.

The second related problem is the size of their fleet of cars. Because the companies did not anticipate the drop in car demand, many of the largest corporations ordered record number of new vehicles over the past few years. At first, these companies tried selling the excess vehicles to “right size” their inventory. But so many cars being sold at the same time depressed the value of these vehicles. The corporations had a hard choice. Either sell the cars at steep losses or lower prices to drive demand for the cars. Many attempted a mix of both of these solutions, which cut revenue and profitability.

Despite these thorny problems for car rental companies, their biggest potential problem is in the future. Autonomous cars will be hitting the roads and will be commonplace in the next decade. Will anyone need a rental car if he can just hire an inexpensive robotic taxi to take him wherever he needs to go? Will people even “drive” cars in 30 years, or will we all be chauffeured everywhere by our cars?

Companies like Hertz and Avis are being crushed in the markets. Hertz traded at over $450 a share in 2014 and now is under $40. Frankly, it surprises me that it trades even this high. Hertz has lost money for three straight quarters and the bloodletting shows no signs of abating.

But there is always hope. Some analysts believe the companies will manage self-driving fleets for the companies that produce self-driving cars like Apple or Google. But that would mean a complete transformation of a very old school business model.

And these corporations will have to do this while servicing massive amounts of high yield debt taken on to fund massive fleets of underutilized cars. Doesn’t sound like a successful winning formula to me. ¦

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a senior derivatives marketer and investment banker for more than 15 years at several global banks.

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