Zipcar Is Poised for Explosive Performance. I'm Buying.

Great investment opportunities don't come along every day. That's why I am excited to share the one I've found. It's a great little company hiding in plain sight: Zipcar (Nasdaq: ZIP  ) .

I am ready to buy shares for my Trends and Trades portfolio (follow along on Twitter). I will tell you why below. But first, I want to take you back to 2006, when an overlooked company named Chipotle (NYSE: CMG  ) came onto the scene. It had all the signs of a winner -- yet many investors missed it.

Hidden treasure
In its early years, Chipotle was a money-losing, cash-burning business slinging expensive burritos.

 Metric

2002

EBIT Margin (7.9%)
Free Cash Flow (Millions) ($42.6)
Pre-Tax ROIC (3%)

Sources: S&P Capital IQ, author's calculations.

To many, Chipotle didn't look like an appetizing investment. But the company had a recipe for success:

  1. A huge potential market, which could support thousands of restaurants.
  2. Improving performance, as each store generated excellent return on invested capital.
  3. Management that "got it" by staying focused on the customer's experience.

The results speak for themselves.

Chipotle was poised to perform in 2006, following its IPO. And boy, did it! Its stock is up 660%. That's 40% returns per year!

The next big winner?
I don't know for sure whether Zipcar will be the next Chipotle, but I do know it shows all of the same signs. Let's walk through them.

  • Huge potential market: As of June 2011, 605,000 members, called Zipsters, signed up to use 9,480 cars in 15 major cities and on 230 university campuses. That sounds impressive, until you learn that management estimates that "10 million drivers live within 10 minutes of a Zipcar." Management also estimates that the global market for car sharing is $10 billion. In the past 12 months, Zipcar generated $217 million in revenue. Zipcar is by far the largest car-sharing company in the world, but there's still plenty of opportunity ahead of it.

    Competitors, seeing Zipcar's success, want to get in on the action. That's why rental-car powerhouse Hertz (NYSE: HTZ  ) launched its On Demand service. Even though Hertz On Demand service is less than one-tenth the size of Zipcar, Zipcar has no intention of letting On Demand grow unfettered. So it created a joint venture with apartment owner/operator Equity Residential (NYSE: EQR  ) to make Zipcars available to its tenants. It's also a big reason for Zipcar's partnership with Ford (NYSE: F  ) to bring Ford products to its college market.

    It's a big, beautiful world out there. And Zipcar wants to turn car owners into car sharers, one Zipster at a time.
  • Improving performance: A very informative metric is about to turn positive for Zipcar: return on invested capital.

    Slowly but surely, Zipcar's prior investments are beginning to pay off. Its initial markets (Boston, New York, San Francisco, and Washington, D.C.) are all profitable and continue to grow. Each Zipcar generates an internal rate of return of 39% to 74%. That's why the company has invested hundreds of millions of dollars growing its fleet of cars, and recently ramped up investment rate.

    Zipcars are very profitable. Now the company is about to become very profitable as well. I sure am glad the market is missing this part of Zipcar's story. It gives us a chance to buy shares at fantastic price.
  • Management that gets it: Management has set up the business to be one part Costco (Nasdaq: COST  ) and one part Netflix (Nasdaq: NFLX  ) . Together, they make a strong business model.

    Like Costco members, Zipsters pay an annual membership fee to get access to the savings, estimated to be around $7,000 per year according to a recent Zipcar survey. And a paid membership fee is a powerful incentive to use the car.

    Netflix movies get passed from house to house. Netflix's technological breakthrough was creating a cost-effective way to transfer those DVDs from one viewer to the next. Zipcar uses location and tracking technology to make sure cars are available in convenient locations when Zipsters want them. So far, members are very happy, as retention rates hover around 98% per month. The fantastic customer experience is what continues to strengthen the Zipcar brand.

    Zipcar is a data-driven company. It has to be to manage more than 9,000 cars. That data helps management optimize the fleet for profitability, too. In an investor presentation, management explained how revenue per car per day is the most important metric it follows. The more revenue a car generates, the easier it is to cover its fixed costs and push profit to the bottom line. Here's how management's change in focus is starting to pay off:

That shows me that management gets it.

I say yes!
Zipcar looks poised for explosive performance. It serves a big, growing market. Its margins and returns are on the rise, which will translate into more profit and a rising stock price. Most importantly, management gets it. It's focused on what matters: getting more revenue-generating cars to more cities.

Fortunately, the market can't look past the lock-up period expiring, which is putting pressure on the stock today. I am more than happy to take advantage of the selling pressure and will be buying a 5% position for my Trends and Trades portfolio. Follow all of the action, including all of my next picks, on Twitter.

David Meier is an associate advisor for Million Dollar Portfolio. He owns no shares in any of the companies mentioned. The Motley Fool owns shares of Zipcar, Ford, Chipotle, and Costco. Motley Fool newsletter services have recommended buying shares of Ford, Chipotle, Costco, Zipcar, and Netflix. Motley Fool newsletter services have recommended creating a position in Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2011, at 8:06 PM, nontechie wrote:

    I am a multi-year San Francisco Zipster and love the convenience. From the beginning, there were several cars on the next block but now there are 2 in the parking garage of my downtown condo. All great.

    Yet as an investment I am dubious. One of the attractions of Zipcar is the possibility of occasionally driving cool cars like a Mini Cooper I would never actually buy. But like most Zipsters, I suspect,I am price sensitive. This is a convenience thing, after all and there are alternatives--like just renting a car from hertz which has a "store" also within walking distance.

    So there are price constraints on Zipcar yet also pressures not just to load up on the cheapest "basic transportation" vehicles it can get. And while there are some barriers to entry, like places to park the cars that are maximally convenient to potential customers, somehow I think the deeper-pocketed old-school car rental companies could figure out ways to compete if they decide there's real money in this.

  • Report this Comment On October 27, 2011, at 9:16 PM, Hawmps wrote:

    The Ford deal is huge. I suspect Zip is going to be getting a pretty sweet deal from Ford to get potental future Ford buyers behind the wheel of new Ford zipcars. You can't buy that kind of hands-on exposure to your product on a televisoin ad. I own shares of Zip (but wish I would-a-could-a-should-a waited just a little bit before plunkin' down the $$) and will be holding for the long haul. One of my very, very few non-dividend stocks.

  • Report this Comment On October 27, 2011, at 9:31 PM, robwg wrote:

    I'm certainly not impressed by the authors bar graph with it's scrambled dates. If that chart is any indication of how ZIP manages its data, investors should run away.

    Not confidence inspiring.

  • Report this Comment On October 27, 2011, at 9:58 PM, Vlad71 wrote:

    Comparing past gains of a different stock at a different time isn't a great way to endorse to others the chance a company will succeed

  • Report this Comment On October 27, 2011, at 10:20 PM, ahemhmm wrote:

    I am sorry but this is pure salesmanship, how much does zipcar pay you guys to push their stock?

    I have read so many articles on here that sell a stock by making you drool over some other stock that performed really well in the past.

  • Report this Comment On October 28, 2011, at 12:04 PM, txfan2424 wrote:

    I disagree 100% with this. That chart looks horrible. Less than a year ago it was negative!

    If you eliminate the annual fee, this company is negative cash flow (a fee that is in no way sustainable). As first post mentioned, users are indifferent to name - just price & convenience sensitive. ZIP is most expensive and lacks resources to remain most convenient (see them losing parking spaces in D.C.) - they introduced a new concept and others w/ better models will thrive IMO.

  • Report this Comment On October 28, 2011, at 7:10 PM, bretco wrote:

    David verus Rex, the foolish Fools !

    What is it, buy or sell ?

    Inquiring minds want to know.

    Agree with other comments, this article is more of a sales job than an honest evaluation.

    fool on Fools !

  • Report this Comment On November 01, 2011, at 1:36 PM, n8larson wrote:

    Here's another aspect of Zipcar's business not mentioned in the article: the replacement of the 'company car'. While some college kids might balk at the annual fee, employers (like mine) of those who commute by non-car modes (like I do) are finding Zipcar an improvement over owning/maintaining company cars for use by employee business travel during the day. Empowering employees with Zipcar has many benefits.

    And regarding the implication that the annual fee is the only profit and isn't sustainable, I think Costco would like a word on the subject.

    And, indeed, what's up with that bar chart?

    -n8 (long COST, no position in ZIP but considering one)

  • Report this Comment On November 05, 2011, at 1:01 PM, broil wrote:

    what do you guys think about nat gas act before congress

  • Report this Comment On November 07, 2011, at 2:28 AM, memoandstitch wrote:

    At least this guy is putting his money where his mouth is. Curious though, how much are you putting into ZIP? Better not be $18, just to write an article.

  • Report this Comment On November 07, 2011, at 2:33 AM, memoandstitch wrote:

    Nvm, just checked his portfolio. He's currently

    -14.95% on ZIP.

    Luckily that was only $273.

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