Forecasters say the U.S. car rental industry will find it tough to raise prices on rentals because of ridesharing services like Lyft and Uber. That's bad news for Avis and Hertz, which are not fetching high prices for their vehicles in used-car markets.
Hertz dropped as much as 12 percent Tuesday and Avis shares fell to their lowest price in seven months. Both companies’ stock prices have now declined more than 20 percent this year, and their bonds are slumping, too.
Morgan Stanley analyst Adam Jonas cautioned that a glut of used cars and sport utility vehicles will come off lease and undermine the value of the autos in their fleets. Add in competition from the likes of Uber Technologies Inc., and the rental companies face a rough road ahead, he said. His note to clients followed a report by Ed Groshans of Height Capital Markets on Monday that said used-vehicle prices are still on pace to depreciate by 20 percent or more this year, compared with a typical rate of about 15 percent.
“We believe the U.S. car rental industry may struggle to raise prices sufficiently to offset rising vehicle depreciation expenses,” Jonas said in his note Tuesday. “We see industry conditions as unsupportive for long-term price hikes at a time of elevated disruption.”
Jonas reiterated his skepticism of both companies’ prospects this year, citing their financial leverage and vulnerability to falling used-car prices. His predictions are reminiscent of how Hertz and Avis performed in 2016 and early 2017, when lower used-car prices led to higher depreciation costs. Hertz lost $491 million in 2016, contributing to the firing of Chief Executive Officer John Tague and the hiring of current CEO Kathy Marinello. While Avis stayed in the black, it lowered profit expectations several times in 2017.
The companies’ prospects turned around last fall due to the shortage of used-car supply and increase in demand linked to hurricanes Harvey and Irma.
“The 2017 storms in Texas and Florida created tightness in used car markets as vehicles were damaged and insurance replacement/fleet demand increased that will likely not repeat this year,” Jonas wrote.
Both stocks fell significantly for a second straight day. Hertz dropped 12 percent to $16.86 at 2:10 p.m. in New York, while Avis was down 9.9 percent at $34.84.
Jonas set a $30 price target on Avis as he resumed coverage, and now has a $15 target for Hertz, up from $13. He rates both the equivalent of sell.
The bonds of both companies were the worst performers in the high-yield market Tuesday. Hertz’s 5.5 percent bonds due 2024 fell more than 2 cents and were last quoted at 80.75 cents on the dollar, Trace bond-price data show. Avis’s 5.5 percent bonds due 2023 fell 1.375 cents to 98 cents, according to Trace.
–With assistance from Molly Smith and Esha Dey.
©2018 Bloomberg L.P.
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Photo credit: A scene from the rental car lot at an Avis in the U.S. Part of the rental car business is recovering the value of their cars through sales of the vehicles, but the values of used cars are plummeting. Patrick Fallon / Bloomberg