Please ensure Javascript is enabled for purposes of website accessibility

Hertz and Avis Won't Get the Last Laugh on Uber

By Rick Munarriz - May 23, 2016 at 9:13AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of the leading car rental chains soared 13% last week, but the good times may not last.

Image source: Hertz Global.   

Last week was a good one for investors in the publicly traded auto rental specialists. Shares of Hertz Global (HTZG.Q) and Avis Budget Group (CAR -2.52%) rose 13% apiece for the week.

Financial journalists are crediting the gains to insider buying at Hertz, but there's more to this than that. After all, Hertz executives haven't been the best judges of nailing the stock's bottom in the past. We also have to consider Hertz's fresh financials -- posted earlier this month -- that were actually pretty lousy. 

Worldwide rental revenue at Hertz clocked in at $1.8 billion for its first quarter, 6% lower than the prior year's period. The main culprit here is a decline in revenue per available car day, as Hertz has been forced to offer more competitive rates in a challenging industry climate. Hertz revenue had a rare dip in 2015. It was the first time that its top line had slipped since 2009, according to S&P Global Market Intelligence data. It may not be the last. It's obviously not off to a good start this year, and analysts see a slight decrease for all of 2016. 

Hertz also posted a loss for the period. Deficits are common during the first quarter, the weakest chunk of the calendar for this somewhat seasonal business. However, it did post more red ink than Wall Street pros were expecting. This is the second time over the past three quarters that Hertz has missed badly on the bottom line. 

It may seem encouraging to see CEO John Tague, CFO Thomas Kennedy, and Chief Revenue Officer Jeffrey Foland all step up to snap up shares in the open market following the poorly received Hertz report, but this hasn't been a prelude to a rally in the past. Tague bought shares last summer at $18.06, paying more than twice as much as he paid earlier this month. He also bought north of $24 in late 2014. It's always great to see executives put their money where their mouths are, but in this case it hasn't happened anywhere near a bottom in the recent past. 

Going for a test drive

The more likely catalyst for last week's rally at Hertz and Avis Budget is that things aren't going according to plan for Uber, Lyft, and other peer-to-peer transportation services. Both companies pulled out of Austin earlier this month after a proposition that would eliminate the requirement for fingerprint background checks for drivers was rejected by voters. This follows weeks of legal tussles elsewhere as states argue where drivers should be classified as more than just independent contractors. In short, it's getting harder for Uber and Lyft to do business -- at least at current rates.

This is good news for Hertz and Avis. There's less demand for rental cars if tourists or locals know that a nearby ride is available and affordable. Cab companies are typically the ones seen in the crosshairs of the gig economy that has propelled the popularity and valuations of Uber and Lyft, but rental cars also suffer. Sure, Hertz has struck partnerships here. It teamed up with Lyft late last year to offer rental cars to car-less Uber drivers, but it's clear that it has more to lose than gain if peer-to-peer driving services continue to take off. 

The auto-rental giants have tried to silence disruptors in the past. Avis acquired Zipcar in a nearly $500 million deal three years ago when car-sharing services started to make a dent in traditional rentals, but there isn't a car company out there that can afford to buy Uber now -- or any good reason for Uber to bow out.

Hertz and Avis came through with double-digit percentage gains last week on the notion that the stocks have hit bottom, but that appears premature. Insider buying at Hertz may seem to be in agreement with a turnaround thesis, but the fundamentals just aren't there. The trend still isn't the friend of the car-rental agencies. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Hertz Global Holdings, Inc. Stock Quote
Hertz Global Holdings, Inc.
Avis Budget Group, Inc. Stock Quote
Avis Budget Group, Inc.
$146.68 (-2.52%) $-3.80

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.