Since Mar 31, Pentwater Capital Management has increased its total holdings of Dollar Thrifty Automotive (DTG) by 35%. In a recent flurry of purchasing of activity, this hedge fund now holds a total of 3.2 million shares of Dollar Thrifty. Why has this company positioned itself as a 11.4% owner of Dollar Thrifty Automotive?
Over the past month, the Pentwater Capital Management has spent an average $78.59 per share to increase its hold on Dollar Thrifty. The car rental company’s shares are now trading at about $80.96, and it is Pentwater’s only major investment in car rental. Pentwater specializes in merger arbitrage and successfully bet on Google’s (GOOG) Motorola Mobility, Express Scripts’ (ESRX) Medco, and Kinder Morgan’s (KMI) El Paso mergers recently (checkouttheotherstocksthatPentwater’smanagerMatthewHalboweristradingrightnow).
Much of Pentwater’s purchasing activity comes as Hertz (HTZ) reconsidersitsacquisition of Dollar Thrifty in order to compete with Enterprise, the private company which maintains the largest hold on car rental market share. At a conference call on May 6, Hertz management indicated that it is going to pursue the deal intently, showing optimism that the Federal Trade Commission will approve the merger after the divestiture of Hertz’s discount rental brand Advantage. Two years ago, the company placed a bid in the low $40s that ultimately gave way to a bidding war with Avis (CAR). Now, an acquisition of Dollar Thrifty would come at around double the price.
Another major hedge fund manager, James Dinan (see YorkCapital’s stock picks) holds 7.2% of his portfolio in Dollar Thrifty and 5.0% of his portfolio in Hertz. The fund has owned about 17% of Dollar Thrifty since the first quarter 2011. That gets us thinking that some of the major managers at York and Pentwater are buying on the hopes of a successful merger. Paul Reeder’s PAR Capital, a Boston-based hedge fund that focuses mainly on travel and online media industries, also has a large stake in the company. The fund had nearly 2.3 million shares of DTG at the end of March. There were 30 hedge funds with bullish DTG bets at the end of March. Collectively these hedge funds owned more than 60% of Dollar Thrifty’s outstanding shares (see the details here).
Dollar Thrifty shares are trading at their highest historical prices, so should private investors follow Pentwater’s and York’s lead? The company’s price/book multiple of 3.6 is higher than the S&P Industrials Sector average of 2.5, and its shares are trading at 14.9 times forward earnings–about the average for the sector. Hertz, by contrast, is trading at 9.6 times forward earnings and might on surface seem to be a fairer investment in the car rental business. The cash flow statement is a little more telling. Cash flow per share of Dollar Thrifty is at $16.20, up from yearly averages $5.70 in 2011 and $5.00 in 2010. Still, the price/cash flow for Dollar Thrifty is 4 times higher than that of both Avis and Hertz.
Despite the rough valuation data, the company has been effective at cutting costs: The cost per vehicle has declined by over $100 over the past year, largely due to the healthier used car market and broader market improvements. Revenue has also increased year-over-year to $339 million from $332 million in 2011.
So Dollar Thrifty is a healthy company, though seemingly trading at a premium. If you think that a Hertz/Dollar Thrifty conglomerate could slay the Enterprise beast, then now could be the time to go long on Dollar Thrifty.