Parents Want Back Car Rental Concerns Gone Public

<B>Parents Want Back Car Rental Concerns Gone Public</B>

By Lynn Woods

It's a tribute to the car rental companies' strong earnings and overall excellence of performance that their parent companies now want them back.

Last September, the Ford Motor Co. announced its intention to buy back the 18.5 percent of the Hertz Corp. it doesn't already own. A month earlier, Cendant Corp. proposed to acquire the oustanding shares of Avis Group Holdings Inc. Last year, Avis Group was formed after it bought PHH and Wright Express from Cendant. Some said Cendant engineered the move as a way to ease the debt load on the parent company.

That Hertz and Avis, after several years of outstanding growth, are desirable acquisitions no one disputes. At Hertz, total revenue reported for the third quarter was $1.33 billion, a 6.9 percent increase above revenues in 1999. Pretax income was $235.6 million. Since it went public in 1997, Hertz's profits consistently have gone up. In the first half of this year, Hertz's net margin was 6.6 percent--more than the 5.2 percent of Ford's automotive business.

Avis' earnings per share are expected to triple from 67 cents in 1998 to $3.18 this year, according to David Riedel, vice president of equity research at Salomon Smith Barney. Avis' third-quarter earnings, including its PHH vehicle management services business, reached $3.23 billion, compared with $2.32 billion for the nine months ended in September 1999.

Prospects at both companies remain bright, even as growth in the industry has slowed somewhat this year. At the end of the summer, Hertz readjusted its future earnings estimates, although its actual 3Q earnings managed to beat the adjusted estimate by 3 cents per share. That has left many analysts and industry observers shaking their heads over the valuations Ford and Cendant are placing on their car rental progeny.

Ford is offering a price of $30 a share--a quarter more than the IPO price--reflecting half of the value of the stock's highs last year. "The price offering is ridiculous," one observer told top management during Hertz's announcement of its third-quarter earnings. "You do a fabulous job of doubling earnings. I'd propose a 20 percent premium" to buy the company. Cendant was offering to buy back Avis' stock for $29 a share--$6.56 more than the price of the stock on the first day of trading.

One reason Hertz' stock has not traded well is that institutional investors are scared off by its limited liquidity, said Riedel. But there's another, more fundamental reason why the industry as a whole has not been a star on Wall Street. "Wall Street always has concern for the price sensitivity of the business," said Neil Abrams, president of Abrams Consulting International, a car rental consultancy in Purchase, N.Y.

In the case of Hertz, a decline of emplanements caused by delays at United Airlines and a failed attempt to raise rates led to a situation where the company had too many cars. Prices flattened, and the stock fell.

But Abrams said stock growth even has been flat for Dollar Thrifty Automotive Group, which has been going gangbusters ever since it was spun off from Chrysler Corp. in 1997. In the third quarter, it reported net income of $36 million, 19 percent higher than 3Q 1999. "What the hell do we have to do?" he asked. "I don't think Wall Street has figured out the car rental industry."

The irony is that the parent companies, despite their meager offers, could receive a boost from their car rental firms. The merger of HFS and CUC that led to the forming of Cendant two years ago has been "a debacle," according to Abrams. After spinning off its noncore assets and watching its earnings per share decline, "Cendant needs a strong core business," he said.

In the case of Ford, buying back Hertz fits into the company's strategy of diversifying into customer service types of businesses, including the $1.6 billion acquisition of Kwik-Fit Holdings in Europe. "Hertz provides Ford with a laboratory in which customers can review the fleet," said Riedel. Another factor might be manufacturing issues the company is experiencing due to the Firestone tire fiasco, said Abrams. "Perhaps Ford wants more control over the distribution process and the economies of the business," he said.

Meanwhile, ANC Rental Corp., the combination of National Car Rental, Alamo Rent a Car and CarTemps USA that was spun off earlier this year by AutoNation, reported operating income for the three-month period ending Sept. 30 of $98.3 million, a 222 percent increase over the same period in 1999. Revenue decreased 1.7 percent, to $1 billion.

National finally has resolved the problems it was having with its new Odyssey system and business is going well, according to Riedel. After dabbling in the leisure business, the company has switched course and now is raising prices in some markets to better reflect its identity as a premium corporate provider, he added. That leaves Budget Rent a Car, whose performance consistently has been disappointing. The domestic car rental group has done well: Third-quarter earnings rose 5.4 percent, compared with third quarter 1999, to reach $431.1 million. But losses in Europe--amounting to $17.3 million for the quarter--and persistent problems in integrating the Ryder acquisition into the Budget truck rental brand continue to drain company profits.

Budget recently closed on the sale of Cruise America, which generated $27.5 million, and VPSI, its van pool business, which reaped another $27 million. To reduce costs, it laid off 1,000 employees. It has appointed a former U-Haul senior exec, David Schmeltz, senior vice president of operations, indicating the company is serious about resolving the cultural and technological differences that plague the Ryder integration.

Perhaps most significant to its recovery are plans to franchise its corporate-owned business in Europe. Budget already has announced the sale of its Denmark locations to a licensee. Germany, where Budget had to rebuild its business after the fiasco with former franchisee Sixt, particularly has been onerous: The start-up cost of opening 75 corporate-owned locations in the country has been "huge," said spokeswoman Kimberly Mulcahy. Other countries in which Budget maintains corporate-owned facilities are Austria, France, Spain, Switzerland and the United Kingdom.

While the next few quarters promise to be challenging for the car rental companies, corporate travel managers may well rejoice: Airport pricing is expected to be down 2 percent to 3 percent and corporate rates will remain flat, according to Riedel and other analysts.