The Foolish Fundamentals
While all that talk of higher top and bottom line guidance, synergies and growth opportunities sounds exciting, is Hertz worth buying at current prices, despite rallying roughly 45% over the past six months?
First, let’s compare Hertz to its primary competitor, Avis Budget Group, as well as industrial rental peer United Rentals, Inc. (NYSE:URI), to see how it measures up.
|Forward P/E||5-year PEG||Price to Sales (ttm)||Debt to Equity||Return on Equity (ttm)||Profit Margin|
|Best Value||Avis||Avis||Avis||United Rentals||Avis||Avis|
Source: Yahoo Finance
As a stock, Avis seems more fundamentally sound than Hertz or United Rentals. However, given Hertz’s strong performance over the past five years, a slight premium in price to earnings and price to sales was expected.
Car rental businesses are also high debt ones, due to the need to initially purchase large quantities of vehicles. The companies then recover their investments through rentals, and eventually sell them through their used car sales locations. It’s a business model that depends more on sales volume -- hence the strategic positioning at high-traffic airport locations -- and less on margins.
Let’s compare the top line growth of these companies.
Although Hertz’s revenue growth isn’t as steep as its competitors, it nonetheless holds a commanding lead, and the acquisition of Dollar Thrifty will only widen the gap even more.
Lastly, we should look at Hertz’s cash reserves and long-term debt.
Judging from those numbers, it doesn’t look like Hertz will make any more big acquisitions soon.
The Foolish Bottom Line
Although Hertz’s stock is slightly overvalued compared to Avis, the company has some bright growth prospects down the road, especially if air travel continues to climb in 2013. The company’s business model is easy to understand, and will remain in constant demand if the economy improves.
However, lingering macro threats could cast a dark cloud over discretionary spending worldwide. That could lead to continued pricing wars down the road, which would crimp the industry’s thin margins and keep shares under pressure.
The article Hertz: Is it Time to Buy the Rental? originally appeared on Fool.com and is written by Leo Sun.
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