Why I Think You Should Sell This Car Renter Now

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Car-sharing leader Zipcar (Nasdaq: ZIP  ) may look like it stepped on the gas in the third quarter as earnings showed it zipping ahead, but I wouldn't be too quick to drive off with the stock. You're likely to end up in the breakdown lane if you jump in here.

Zippy performance
Zipcar moved a step closer to profitability when it said revenues jumped 15% as membership rolls rose 18%, which says people are joining up but not fully using the service. That means they'll rethink that decision later on when it comes time to renew, and probably opt out.

I admit that the logic of renting a car for a couple of hours for more than what it would cost me to get it for a full day from the likes of an Enterprise Rent-A-Car escapes me, but I guess there's some sense in urban settings at least for drivers to opt for a pick-up-and-go service. But competition from better-financed rivals like Hertz (NYSE: HTZ  ) show Zipcar's dominance may be fleeting.

Zipcar, which has been around for more than a decade (since 2000, actually), has 767,000 members, yet Hertz on Demand, which only launched in July , has hit 166,000 members, a 170% increase in membership while revenues surged 70%. Hertz, with its better marketing prowess, already has nearly a fifth of the members its rival does.

Stuck in traffic
And there's more competition besides, including Daimler's car2go, Enterprise's Mint Cars, and to a lesser extent, Avis (Nasdaq: CAR  ) , whose On Location service is geared more toward its corporate customers than as a residential car-sharing service.

As the competition grows, Zipcar is going to face pressure to eliminate its annual membership fees, which will be a real blow to its revenues, particularly as they factored so heavily in its results this quarter. When (Nasdaq: PCLN  ) eliminated booking fees a few years ago, it wasn't long before Expedia (Nasdaq: EXPE  ) and Orbitz (NYSE: OWW  ) were forced to follow suit. Expect Zipcar to cave in as well on its pricey $60 to $100 application and membership fees, which represented 14.3% of its revenues in the third quarter, up from 13.6% last year.

Hertz, which is trying to buy Dollar Thrifty (NYSE: DTG  ) , might end up pushing its On Demand service even harder if regulators get stuck on industry competition issues. The acquisition would leave just three players controlling 95% of the car rental market. It already plans on converting its entire 375,000-vehicle fleet to be able to connect with the on-demand service. Each car will come equipped with an RFID chip that will enable customers using a computer or their smartphone to reserve and unlock a rental car. That would equate to a fleet 30 times the size of Zipcar's.

The short story
Yes, I've been bearish about this stock for some time (the stock is down 47% since I weighed in on it in February on Motley Fool CAPS compared to a 1% rise in the S&P 500), and there's little to suggest anything's really changed my outlook on it.

Zipcar's stock got a bigger than usual bounce because it was heavily shorted, but once the squeeze wears off, you can expect the car-sharing service to once again have four flat tires and be up on blocks. For investors who have been waiting for a rebound, I'd use the surge to cut my losses and get out. Car rental agencies around the globe have reported better-than-expected numbers -- even priceline's was a big contributor to its surprisingly strong quarter -- so don't read anything special into Zipcar's results.

But let me know in the comments box below if you disagree with my bearish outlook and see a reason that its higher-cost service will be able to beat the competition across the finish line.

Waiting for a tow
I may not be ready to put the pedal to the metal with Zipcar, but others think it may be time to back up the (rental) truck and buy more. The Motley Fool's top Zipcar analyst wills tell you what everyone --and apparently me --is missing about Zipcar today in his premium research report on the company. Click here now for instant access.

Read/Post Comments (11) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On November 09, 2012, at 3:45 PM, scott1020 wrote:

    Zipcar's trends all remain positive if you track the major metrics over the past 10 quarters or so. Additionally, for leisure travel, hotel renting, daily car renting etc. will decrease. I for instance do not book hotels for my trips very often anymore, nor do I ever use a rental car. I don't want to deal with a car when traveling and almost everywhere outside of the U.S. is more conducive to this.

    Another fact is that car sharing trends globally are growing robustly. All Zipcar needs to do is maintain a profitable operation in North America with sufficient cash flow and acquire as many companies as possible over seas, to provide a large comprehensive global service.

    Car2Go is always compared to Zipcar, which quite frankly is odd. The primary trips that this service is impacting are taxi, walk, bike, and transit. It isn't really competing with Zipcar or car rental trips.

    Zipcar has a stake in Wheelz too so they are diversified within the peer-to-peer market. Wheelz just began service to compete with Getaround and RelayRides in SF, and will be expanding into other markets.

    Then there are the carpooling apps, which are currently in legislative hurdles. Ultimately, one could be being picked up by an owned vehicle being rented and used to carpool......

    Anyways, I do not think that the car rental agencies are too concerned with the wide array of technological developments within car sharing/renting. They are bloated by their airport dominated operating models, which will be supported by business travel needs for a while.

    Leisure travel, however, will begin to shift towards more convenient, time and cost effective, wide-based options. Why would I ever stay in a hotel, when I can pay less for a studio/apartment with my refrigerator, oven, etc.?

  • Report this Comment On November 09, 2012, at 4:17 PM, dbtuner wrote:

    I agree with your premise on ZIP. I think you may be off on your Hertz converting all cars to On Demand. The technology they use, which is the same technology that ZIP uses, is too costly. The embedded cell phone cost of $10/month/car + hardware is too costly for Hertz to roll out to their fleet. It would cost them $40M just in cell charges. Hertz appears to have stalled their On Demand roll out and has less than 800 cars equipped.

    Avis now has 30,000 On Location cars equipped with technology from IDSY. The IDSY technology does not require a cell phone as it uses WiFi. The monthly all-in cost is $9/month/car including hardware. The IDSY technology also installs in about 2 minutes as compared to 1 hour for ZIP/Hertz. I think the go to car share company for investing is IDSY, not ZIP.

  • Report this Comment On November 09, 2012, at 4:38 PM, TMFGemHunter wrote:

    Interesting article. I don't agree with your characterization of Zipcar as higher-cost, though. For daily rentals, it is true that Zipcar is usually more expensive, but that's because the company wants to discourage renting by the day. For most city-dwellers, the best all-in rate for a daily rental you're likely to find is around $35-$45. You can rent a Zipcar for 3-5 (sometimes even 6) hours for that amount, and it includes gas and insurance. If you needed to buy insurance from a traditional rental car company, that would set you back another $15 or so.

    Also, Hertz just started calling its car sharing service Hertz on Demand recently, but (according to the company's own website), Hertz started offering hourly rentals in NYC and Boston in 2007. It's been competing in two of Zipcar's four "established markets" for 5 years, and Zipcar is still showing mid-teens revenue growth in those markets. Perhaps Hertz, Enterprise, etc. will finally figure out how to compete with Zipcar at some point, but there's no evidence to date that they can do so.

  • Report this Comment On November 09, 2012, at 5:09 PM, TMFSpeyside wrote:

    This argument about HTZ is not new, but there never is any data to back up the conclusion that you and others draw. Sure they have 160,000 members, but membership is free, so how hard is it to get people to sign up? They say that revenue is up 70%, but off of what size base? HTZ throws out these numbers on analyst calls, but always are careful to omit any statistics that would allow us to objectively evaluate that part of their business.

    Rick: do you have *any* data that shows that the On Demand business is anywhere near the size of ZIP's and is having any impact at all?

  • Report this Comment On November 09, 2012, at 5:10 PM, TMFSpeyside wrote:

    Sorry, I meant Rich. :-)

  • Report this Comment On November 09, 2012, at 5:38 PM, mrbkush wrote:

    To me the funniest part is this attempt to call it car-sharing. It's car renting my any other name it's still car renting.

    The biggest competition seems to be coming from Enterprise as they have gone straight for the heart of ZIP: college campuses. They have over 1 million cars and regardless what DB says about the technology, it isn't that big of a deal.

    All rental cars will be Unattended Car Rentals (UCR) in a few years as the technology matures and the benefits of not needing as much staff forces all the companies to do it. That will allow every company to place cars strategically around cities: at hotels, at convention centers etc.

    The loyalty of ZIP users will be severely tested when their price points are broken.

    C2G is always portrayed by the ZIPsters as not competition for some reason. but in DC C2G first bid away half of ZIP's parking spots and then made a deal with DC to have free parking for all their cars in the city. Interesting that C2G would be buying the same parking yet not competing.

    ZIP will be having to pay something or more than now for much of what they are doing. E will bid for those existing college deals and will be able to offer more service and extra cars. Will ZIP be able to pay for the spots they now have on the various campuses?

    ZIP isn't really a first mover but an early mover and they often are blown out by bigger entities with huge resources. Anyone used Word Perfect lately? How about Lotus 1, 2, 3? Einstein Writer?

    The biggest exception to this would be Southwest Air - we'll see which way it goes.

    Unless ZIP has copyrighted the names of their cars, they have no IP to speak of.

    At 2 cents a share they should be able to buy about 40 new cars with their profits.

  • Report this Comment On November 09, 2012, at 8:41 PM, aragorn6 wrote:

    I wonder...

    I noted a healthy 15% surge in the share price today. Since it's been recommended as a best buy by TMF, does that mean that loads of Fools have suddenly bought into it? Or could such a surge be the result of some pension funds or something?

    Anyway, you all talk about the rental price of cars and compare ZIP to the likes of Hertz and others. But I wonder... Do they all operate the same non-descript box saloons or do they differentiate themselves on such weird things as quality and style?

    It seems to me that a higher rental fee is justified for a higher quality car, or one that is perceived as such. How much extra would you be willing to pay for a day's use of a Ferrari, for example? An Audi? A BMW? Or a Mustang Fastback straight out of Bullitt?

    Also, what condition are these cars actually in? Sure there's regulation on the safety aspects and such, but in my experience that doesn't make any difference. Many rentals still have shoddy brakes, indifferent steering, worn out suspension and exhausted motors -- no matter which firm you rent from. But some are definitely worse than others.

    Then of course you have to be on your toes when you deliver the car. They'll make you pay for any scratches and dents -- even if they were already there when you picked the car up. Some firms are better than others regarding this, but that can be reflected in the rental price to start with.

    I expect many of you to slam me for these comments, but in Europe, where I am, not everything is decided on price alone. If I were to consider investing some dosh in a rental car business, I would like to know that apart from great management, a solid biz model and copious cashflow, they also rented out cars in great condition that would pass inspection by keen-eyed exoerts.

    But hey, what do I know? The likes of Hertz, Avis and Enterprise you'll find over here. All the others, including ZIP, could just as well be names of villages in Siberia.

  • Report this Comment On November 10, 2012, at 1:58 PM, FundamentalsMan wrote:

    In discussing ZIP, it is interesting to me that people always seem to leave out comments specific to the markets where ZIP is actually trying to grow and compete. The service and competition is particularly geo-specific so it would make more sense to evaluate ZIP's position in the markets where they are operating (these do include various European cities).

    As the first comment noted, all of the trends have been positive. The company has decreased their operating costs and expects further decreases driven by efficiencies of scale. They have also increased their revenue . They have a 92% customer retention rate (though their longer term customers do not use the service as much as new customers). The earnings per user have decreased slightly as they include their marketing costs in this figure and are spending more on marketing which, appears to be working, given the recent quarter results. Revenue, and ROE are up and they are growing their fleet and markets at a healthy pace. While bigger rental agencies might present a threat if they are successfully able to amend their operations to compete effectively, the fact they are responding to such a small company at all indicates they feel threatened which speaks to the potential ZIP and similar companies have.

    Addressing the demand the company seeks to fill, I would note that in a very quick and informal evaluation of what my car costs me a month I came up with about $20/day. This figure excluded any maintenance or registration fees but did include the fact I am still paying for my car. I also live in a city where parking is not much of an issue so in more urban areas the convenience of a designated spot or need to not pay for a spot could be considered. Mostly I use my car to get to and from work which is about a 30 min. commute each way. Looking at the hourly rate for a ZIP car, the $8 could make sense if it facilitated my transportation needs without requiring me to own. A quick look at the Hertz website indicated my best offer would be $24/day not including gas or insurance. I'm not trying to be overly enthusiastic for ZIP here, but just to point out that they do seem to have a legitimate business model that fundamental trends indicate is working. The stock price as indicator, on the other hand, looks dismal.

  • Report this Comment On November 10, 2012, at 3:48 PM, dbtuner wrote:

    Retention is 97.3%, not 92%.

    The issue is they are not growing as fast as they need be to support their valuation. 18% in users and 15% in revenue is not very fast. I can get that with companies 50X larger and more profitable.

    The quality of their earnings was awful as well. Take out FX, interest, and the EV credits, and they earned 3c. Not quite as impressive as the 10c claimed.

  • Report this Comment On November 10, 2012, at 6:34 PM, FundamentalsMan wrote:

    Thank you for the correction. I posted the 92% from memory from when I read the prior 10-Q some weeks back. Since posting I have read the TMF report and saw that it said 97%. So, all the better.

    I was just reading the earnings review on here when l heard another interesting statistic, on the news playing in the background, that just could play to ZIP's advantage. That is that the average car age in the U.S. is 11 years. If ZIP can convince even a small portion of those with older cars that they can serve their transportation needs, that could be a boon to their growth as people replace their car with ZIP.

    I guess all growth is relative and I could stand to do more research on other car rental/sharing companies. As a subversive company I would consider that the more important figure than bottom line growth. So long as they are out-growing and have a better competitive strategy than their competition I can accept sustained not lighting fast growth. Interest and FX will come and go but I'm alright with earnings from EV credits. That is sustainable enough. Unless there is some reason why it's not... Still, even .03 would have been a 300% beat. I wouldn't bet the farm on this one but I think it is certainly worth watching and perhaps adding to a position as company performance earns.

  • Report this Comment On November 11, 2012, at 8:11 AM, dbtuner wrote:

    "interest and FX will come and go"

    partly true. Some qtr's can see negative interest and FX which will work against earnings.

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