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Dollar Thrifty Could Go To Fifty

Posted: Jul 02, 2007 09:25 AM by Glenn Curtis

Tickers in this Article: BA, HLT, MAR, HTZ, DTG

On Monday June 25th, Christina Woo, a Morgan Stanley analyst, downgraded the stocks of several car rental companies, including Avis Budget (NYSE: CAR), Dollar Thrifty (NYSE: DTG), and Hertz (NYSE: HTZ) to "underweight" from "neutral".

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Woo made the move after the channel checks she (or a member of her team performed) revealed a general weakness in pricing. Higher interest rates and the prospect for higher auto costs also apparently played a role in her decision.

Now to be clear, I don’t dispute Woo’s findings. In fact, I agree that the near term outlook may be a bit sketchy for auto rental companies if for no other reason than the cost of fuel is up -- and as a result some consumers are probably going to stay closer to home than they might have otherwise.

However, I am still bullish on the group for the long haul. And among my favorite picks among the aforementioned players is Dollar Thrifty.

Why Dollar Thrifty?
First off, it's cheap. On a P/E basis, Dollar Thrifty appears to be the cheapest. In fact, it trades at just about 15 times this year’s consensus estimate of $2.68 a share, whereas Hertz currently trades at just over 21 times the current year estimate of $1.18 a share, and Avis Budget trades at about 22.4 times current year expectations of $1.23.

Solid Growth Prospects
Going forward, Dollar Thrifty is expected to grow at a healthy clip in spite of the weakness in the travel industry right now. In fact it’s expected to grow its bottom line EPS numbers by about 16% in the coming year. While Hertz and Avis Budget are expected to grow as well in the coming year, I would point out that it appears as though their growth is coming off what I think is a relatively low base.

Downside Protection
I like the fact that the company’s book value is so high in proportion to its stock price -- as it gives me a sense that the downside is somewhat protected. The company trades at about 1.46 times its book value of $27.51 a share. And while Avis Budget trades at an attractive price-to-book multiple as well (at roughly 1.15x), Hertz trades at more than three times book.

There are some other things I like as well:

• From my experience, I find that Dollar Thrifty usually has the best deals in terms of price. And that’s important because let’s face it, a rental car is a rental car no matter what company you go to, right? In addition, during trying times, I think that travelers will become much more price sensitive -- and this could play right into the company’s hands.

• DTG has been actively scooping up smaller rental companies in an effort to build its geographic footprint. In fact, in early June it announced that it picked up "Thrifty Car Rental" locations in Kentucky, Tennessee, and Texas.

• It just landed $600 million in new credit facilities. In short, this should allow the company the flexibility to reduce debt, market its services, and possibly repurchase its stock.

Macro Trends Driving the Industry
From a macro standpoint, there are also some things that I like about the entire group. For example:

Over the long run, the demand for commercial aircraft and travel is expected to perk up. In fact, I’ve seen estimates that suggest more than 3,000 business jets will be built between 2007 and 2009, and that the worldwide installed seat base could almost double by 2021. Anyway, the point is that all of these people (or at least a lot of them) will need ground transportation once they get to their end destinations. Therefore car rental companies seem like an obvious beneficiary.

As for fuel prices, sure, they are currently high. But remember that we’ve seen stuff like this before. Looking back, I remember right after the Gulf War (in 1991 when gas prices were approaching $2 a gallon) that many were saying that the travel industry was near death. But what happened since then? People still traveled. In fact, the travel industry has boomed since then -- and $2 gas is now considered cheap! In other words, I don’t look at current fuel prices as some insurmountable obstacle that’s going to permanently burden our economy, because history suggests that we will become accustomed to a "new normal".

Also, I’d hasten to point out that if the travel industry were in serious trouble, then why are companies like Boeing (NYSE: BA), Hilton (NYSE: HLT), and Marriott (NYSE: MAR) trying to grow their businesses? I'd wager that these companies are on the offensive because they see increased demand down the line.

Next, look at how the U.S. population has spread out over the years. What’s happening? There is a shift in population (both individuals and businesses) from urban areas to more suburban areas. And again, I think that this is beneficial for car rental companies.

So where can the stock go from here?

Assuming that the company is able to hit the consensus numbers in '07 and '08 ($2.68 and $3.10), I think the stock could trade north of $50 within the next 18 months.

The Bottom Line
I agree that the near term outlook for car rental companies doesn’t look so hot. However, I firmly believe that the longer term outlook for travel related companies is promising. And that is why I can’t help but think that companies like Dollar Thrifty have the potential to fare quite well.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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