The Motley Fool Previous Page

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

David Meier
October 27, 2011

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.



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 w