Car Rental Stocks Will Drive You Off the Road

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Dollar Thrifty rejects Hertz's buyout offer, takes itself off the marketDollar Thrifty Automotive Group (DTG) is tired of calling "shotgun."

After 18 months of letting potential buyers kick its tires, the auto rental agency is announcing that it's no longer for sale. This is bad news for Hertz (HTZ), which seemed to be the last bidder standing after Avis Budget (CAR) dropped out last month.

Along with market leader Enterprise, the four largest car rental companies make up the lion's share of this cutthroat market.

Buying Dollar would have helped everybody, since it's one fewer competitor that can potentially break into a pricing war. What's bad for the operators is naturally good for the consumers. Renters can continue to expect at least one desperate company offering ridiculous prices to move available cars off the lot.

Take Your Foot off the Accelerator

Now that sector consolidation is off the table, there really isn't a lot to rev this market higher. Analysts see all three publicly traded companies posting single-digit revenue growth this year and again in 2012.

Those projections can always trend lower if the economy doesn't bounce back. If you've hung out at an auto rental shop you know that the customers are a steady mix of corporate travelers in suits and tourist families. If the economy remains sluggish, companies won't be too keen on bankrolling business trips and pleasure seekers just won't have the discretionary income to get away.

However, there are also a few other trends getting in the way of a potential turnaround.

Where Have All the Renters Gone?

For starters, no matter what your antique car-collecting neighbor may tell you, new cars continue to get better and are easier to maintain. The more reliable cars become, the less time you'll need a rental because your vehicle is in the shop.

The urbanization trend is also quite real. People continue to move back into revitalized downtown areas in metropolitan cities where mass transit is cost-effective, even if it's not always efficient. The result is that more people can get around without cars in their own towns -- and when they travel, they can stay in spruced-up urban areas where rentals just aren't necessary.

The biggest reason to be wary of this market, though, is the booming car-sharing trend.

Baby, You Can Drive My Car

Zipcar (ZIP) is championing the auto-sharing revolution. Instead of pricey auto-ownership costs for infrequent drivers, Zipcar offers a fleet of 9,480 cars that it rents out on an hourly basis to its nearly 605,000 members.

Unlike traditional rental agencies that treat marked-up insurance and premium-priced gasoline as profit centers, Zipcar includes fuel and insurance with its rentals. The math works for those living in the densely populated markets that Zipcar serves.

What about the suburbs? Well, companies like RelayRides and Getaround are starting to pop up with peer-to-peer models. In other words, your neighbor may be able to make money by renting out a car when it's idle in the driveway. This market is still in its infancy, but General Motors (GM) recently gave RelayRides a huge credibility boost by allowing its OnStar-equipped cars to be automatically eligible for usage.

The future will be challenging for conventional auto rental agencies. The stocks may be selling at low forward earnings multiples, but they're cheap for a reason.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, except for Zipcar. The Motley Fool owns shares of Hertz Global Holdings and Zipcar. Motley Fool newsletter services have recommended buying shares of General Motors and Zipcar.


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