mardi 29 août 2017

Car rental market

In this post, I'll write about the car rental industry instead of writing about individual companies. In US, the car rental market is shared by three companies: Enterprise Holdings (private, about 60% of US market), Hertz and Avis (public, both about 20% of US market). In Europe, the market is a bit more fragmented with the five biggest companies having about 60% of the market, where Sixt (premium segment) and Europcar complement the three previously listed companies.

Characteristics of the industry:

  • All companies buy cars from several manufacturers to spread the risk and respond to consumer demand for renting as well as for reselling the cars;
  • A big part of the activity is to properly manage the fleet of vehicles. For instance, in Q2 2017, Hertz sold a lot of cars in a depressed second hand car market in order to re-adapt its fleet, triggering higher depreciation of the fleet and depressing earnings;
  • Some important operational measures are fleet utilization (usually around 75-80%), revenues per transaction day to be compared with depreciation per unit;
  • Companies buy some cars in the scope of a program where the constructor agrees to buy back the vehicles, whereas the other cars are at risk, which means that they will be sold at the spot market, with no guarantee of pricing. For instance, in 2016, Europcar had 92% of its car under a program, while Hertz had only 31%, bearing more risks;
  • Seasonality is important, spring and summers being the strongest months. The fleet adapts accordingly;
  • Most of the rental companies are highly leveraged and make a distinction between the fleet debt (backed by the cars) and the corporate debt. However, at the end, what counts is the total debt. For instance, both Avis and Hertz have about 15b$ of debt in Q2 2017, to be compared with about 9b$ of annual sales for both with losses for Hertz... The bonds of these two companies are classified as junk;
  • The companies try to anticipate the future regarding mobility, connectivity, car sharing, autonomous driving,... by having agreements with tech companies;
  • All companies (except Sixt) seem to be developing low cost offers in parallel of their traditional businesses.

Without getting into too much details, all rental companies seem to be heavily leveraged, with very low margins and uncertainties related to the development of the car industries. They all seem to target a margin of about 15% Adjusted EBITDA by about 2020, which does not mean much as we speak about "adjusted" accounting and EBITDA does not take into account depreciation, which can vary a lot depending of the second hand market, which does not look promising for the next serveral years, at least in US.

In order to follow these companies, I'll watch the evolution of the debt, utilization of the fleet, revenues per transaction day, the status of the secondary market.

For all companies, we have EV/Sales between 1,8 for Hertz and 2,8 for Sixt which seems to be too high for me, considering the risks mentioned above.

Sources for market shares: Annual reports 2016 Hertz, Avis, Europcar and Sixt

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