Investing in the Recovery With Rental Cars
After falling apart like a Corvair during the recession, rental-car company Dollar Thrifty (NYS: DTG) has rebounded in dramatic fashion. The company has grown its share price about 1,100% from its sub-$1 low point. But does Dollar Thrifty still have some miles left in it, or has the tank run dry?
Can I offer you a free earnings upgrade?
The company recently announced an increase in its 2012 earnings guidance, raising EPS $0.40 from the company's original guidance to a range of $5.00 to $5.60. Dollar Thrifty attributes this increased projection to favorable fleet costs and lower administrative expenses. While the fleet cost savings may come and go, a reduction in overhead indicates a better-run business, and that's always good news.
Dollar Thrifty is profiting from a strong used-car market in the U.S., and this has helped the company save on costs. For each car that the company buys, it assumes less risk of having to depreciate the car to $0. Instead, the company can make back some money by selling the used car to the public. Unsurprisingly, Avis (NAS: CAR) has echoed the same sentiment. It also announced strong projected earnings, based in part on the strong resale market.
The industry has saved on administrative and staffing costs by increasing the number of self-service terminals available to customers. This has allowed the industry to staff locations with fewer employees. Those "preferred driver" programs that let you walk directly to your car also cut down on face time. With so much belt-tightening in a strong market, it looks like everything is on the up and up for companies like Dollar Thrifty.
Dangerous curves ahead
So if now is still a good time to get in, what should investors be watching for as an indicator that the rental market might drop off? First of all, macroeconomic forces have a lot to say here. When the tsunami hit last year, it damaged the supply chain of new cars, and used-car values spiked. While the market has not fallen off as sharply as predicted, a year of good, new car releases could hurt resellers.
Second, in bad economic times, fewer people are renting cars. Vacations drop off, rentals for work go down, and people just generally stay at home and watch the cat. The threat of a double-dip recession has been plaguing the nightmares of rental executives for some time now.
Finally, the market could change drastically. Right now, Dollar Thrifty, Avis, and Hertz (NYS: HTZ) are the only publicly traded companies. However, there have been rumors that the market could get even smaller, with Hertz buying up Dollar Thrifty. As a result, both stock prices been inflated on the assumption that a merger was coming. However, recently both companies have been mute on the topic. An unfavorable announcement could put a damper on both stocks.
Can I get directions to Successtown?
While there are still unknowns and stories to be played out, I like Dollar Thrifty. As with many true growth stocks, this one just keeps on growing. Barring a dip in mid-2011, the stock has continued to grow over the past three years. The outlook for 2012 is good, and even if the merger falls through, the underlying business will still be sound. Dollar Thrifty is a good pick for the rental market and could be a great way to play a broader economic turnaround.
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At the time this article was published Fool contributorAndrew Marderdoesn't own in any of the stocks mentioned in this article. The Motley Fool owns shares of Hertz Global Holdings. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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