Investing in Rental Car Stocks

Despite ongoing economic headwinds, consumers are still traveling both domestically and abroad in high numbers. Consumers may become increasingly cautious if economic conditions tighten further, and some are holding off on booking travel until the last minute compared to previous periods. However, heightened travel also frequently translates into rising demand for rental cars. 

Over the long run, the rental car industry represents a key segment of the overall travel industry that some investors might want to consider. Let's take a closer look at two rental car companies that can benefit from these trends, if you have the risk appetite to put cash into the cyclical travel industry.

1. Avis Budget Group

1. Avis Budget Group

Avis Budget Group Inc. (CAR -0.99%) operates the Avis and Budget car rental brands, with more than 10,000 rental locations globally. The company also owns the Zipcar car-sharing network, which boasts more than 1 million members.

Due to the pandemic, Avis's 2020 revenue tumbled by 41% year over year to $5.4 billion. Fast-forward to 2023, and Avis reached a new revenue record. Full-year revenue totaled $12 billion, while the company brought in profits of $1.6 billion.

Avis has proven to be a more nimble company coming out of the pandemic and has capitalized on the post-pandemic travel recovery. Even if that trajectory slows in the short term because consumer wallets tighten, it has plenty of cash on its balance sheet.

Over the trailing 12 months, Avis has brought in operating cash flow of approximately $3.5 billion. It had about $511 million on its balance sheet at the end of the second quarter of fiscal 2024. Management has said that the company has no meaningful maturities on its debt until 2026.

The company may be negatively affected by the global semiconductor shortage, which for years has affected car manufacturers and created uncertainty about rental car supply.

In late 2021, Avis turned into a meme stock, more than doubling in value after the company's solid third-quarter earnings update and a short squeeze. The stock price has moderated significantly since then, but retail investors optimistic about the company's prospects amid the broader landscape of the travel space might want to take a second look.

2. Hertz Global Holdings

2. Hertz Global Holdings

Hertz Global Holdings (HTZ 1.7%), along with its subsidiaries Thrifty Car Rental and Dollar Rent A Car, fared far worse than Avis during the pandemic. The company's year-over-year revenue plunged by 46% in 2020. That same year, Hertz also paid $608 million in interest on its debt and generated a net loss of $1.7 billion.

When Hertz filed for bankruptcy protection in May 2020, it appeared to be a foregone conclusion that the company's shares would be rendered worthless. Hertz was saddled with billions of dollars in debt, which in bankruptcy must be repaid in full before common equity shareholders can recover any value.

But Hertz subsequently agreed to a bankruptcy plan, and it escaped the financial doghouse in July 2021. Under the reorganization plan, Hertz shed about $5 billion of debt and emerged with liquid assets worth roughly $2.2 billion out of the gate.

Since its bankruptcy exit, Hertz has delivered fluctuating revenue growth and profitability, both on an unadjusted net income and on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis. For example, in 2023, Hertz reported a total revenue of $9.4 billion and a net income of $616 million. That revenue figure was up 8% from 2022, although the bottom line represented a deceleration from the prior 12-month period.

In the second quarter of 2024, both net income and EBITDA were in negative territory. Hertz reported revenue of $2.4 billion in the three-month period, a single-digit decline from one year ago.

In 2021, Hertz placed an initial order for 100,000 Tesla vehicles (TSLA -1.41%) with plans to expand its electric vehicle (EV) charging infrastructure to support the order. Hertz planned to make as many as 50,000 of the EVs available to Uber (UBER 0.38%) drivers to rent by 2023, signaling a move toward a future of mobility featuring flexible and renewable energy-based transportation.

In early 2024, Hertz sold about 20,000 of its electrical vehicle fleet including Teslas, a sign of cooling demand and a function of the higher damage and collision costs associated with EVs. Investors who buy the stock now are doing so because they believe the new Hertz is well positioned to thrive beyond these near-term hurdles.

However, investors in Hertz stock should be aware there are risks associated with this rental car company -- as well as risks inherent for Avis -- as the car rental industry continues to manage the effects of the post-pandemic reality, the economic backdrop, and the operating landscape for gas-powered vehicles as well as EVs.

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Should you invest?

Should you invest in rental car stocks?

The return of air travel is great news for rental car companies, but should you invest in rental car stocks? Companies in this space are subject to cyclicality, so investors should proceed with caution and only invest in businesses that align with their overall portfolio objectives, risk tolerance level, and long-term investment goals.