Welcome to part two of the “Why the low multiple: rental car companies” series (for more on the “low multiple” series in general, see my intro post here). In part 1, I provided a ton of background on the rental car companies and then dove into the bear case.
The peak of the bull market for used cars has definitely passed, but there is far too much certainty from the consensus that a return to 2019 prices is imminent. Probabilistically, a new normal that sits somewhere between the two is most likely. Like nat gas rig counts, used car prices are a lagging indicator, since you can't have used cars without new cars. That takes time. The utter dearth of new vehicle production from the height of factory closures has yet to really materialize in the market; the single largest steady supply of used vehicles is returned leased/rental vehicles after 3 years. Where exactly is the glut of supply of used cars that will supposedly crash the entire market going to come from? Manufacturers have only been able to start ramping up production since H1 2023, so those effects won't be seen for even longer downstream. A Tegus expert call with a car industry insider would really be necessary to flesh out the details. Now... if only we knew of a blogger who is sponsored by that company! *wink wink nudge nudge*
Nice article. I haven’t read through any of the filings on either company but CAR and to a lesser extent HTZ have had meaningful capex increases over the past year. In the case of CAR it’s more than double pre-covid levels. Is that lack of discipline, a dramatic upturn in business or something else?
The series has just started and already is going from strength to strength. :-)
This probably adds just short-term noise to your article, still, to prop the bear-case a little, I'm quoting here Steven Anastasiou analysing the latest CPI print:
"While the ongoing weakness in durables prices was expected to be driven by used car prices in December, it was instead driven by another decline in new vehicle prices, which fell for a third consecutive month."
"With new vehicle prices now recording significant declines, shifts in wholesale used car prices suggests that additional deflationary price pressures are likely to emerge over the months ahead."
Really enjoy your thought process. I have always leaned toward low PE investing because the expectations are generally much lower and a reversal (if it comes) tends to generate outsized returns. However, the risk of value traps is always there and you're posing the right questions regarding industry dynamics and sustainability of cash flows to distinguish between the two.
I wonder if you'd consider expanding your definition of low PE to include situations where earnings are temporarily negative and/or there's an embedded growth opportunity that means current earnings are not representative of the company's earnings power. While such situations entail additional risks, they also can provide much higher upside if the bull scenario plays out.
I owned $CAR going into the GFC, after the Cendant break up. I think I'd paid around $15. Was cheap at the time based on the kinds of metrics you discussed above.
But the company had big warehouse lines that they used to fund their fleet purchases, as well as ABS facilities. As we all know the ABS market went into a deep freeze due to the troubles in the mortgage area. The market was pretty dubious about them surviving. CAR stock bottomed in early 2009 at about 35 cents. I bought a little more under $1 as a sort of YOLO (this was pre-YOLO) and unloaded in 2011 in the high teens.
This is an industry I really never looked at from an investment standpoint given HTZ bankruptcy but your article really opened my eyes to the opportunity (and risks). Well done.
Cool series. SIXT is listed and family owned in Germany. They are quite strong in software and app dev - try download the app. The two brothers that took over mgt recently are just as ruthless with their staff as their mum and dad - what is good and bad as well. You can get a discount by buying the pref share that has no or just very few voting rights, so the family has control despite owning less than 50% equity. I see the same bear case logic for the industry, so I pass.
The peak of the bull market for used cars has definitely passed, but there is far too much certainty from the consensus that a return to 2019 prices is imminent. Probabilistically, a new normal that sits somewhere between the two is most likely. Like nat gas rig counts, used car prices are a lagging indicator, since you can't have used cars without new cars. That takes time. The utter dearth of new vehicle production from the height of factory closures has yet to really materialize in the market; the single largest steady supply of used vehicles is returned leased/rental vehicles after 3 years. Where exactly is the glut of supply of used cars that will supposedly crash the entire market going to come from? Manufacturers have only been able to start ramping up production since H1 2023, so those effects won't be seen for even longer downstream. A Tegus expert call with a car industry insider would really be necessary to flesh out the details. Now... if only we knew of a blogger who is sponsored by that company! *wink wink nudge nudge*
Nice article. I haven’t read through any of the filings on either company but CAR and to a lesser extent HTZ have had meaningful capex increases over the past year. In the case of CAR it’s more than double pre-covid levels. Is that lack of discipline, a dramatic upturn in business or something else?
The series has just started and already is going from strength to strength. :-)
This probably adds just short-term noise to your article, still, to prop the bear-case a little, I'm quoting here Steven Anastasiou analysing the latest CPI print:
"While the ongoing weakness in durables prices was expected to be driven by used car prices in December, it was instead driven by another decline in new vehicle prices, which fell for a third consecutive month."
"With new vehicle prices now recording significant declines, shifts in wholesale used car prices suggests that additional deflationary price pressures are likely to emerge over the months ahead."
https://www.economicsuncoveredresearch.com/p/cpi-review-december-2023
Really enjoy your thought process. I have always leaned toward low PE investing because the expectations are generally much lower and a reversal (if it comes) tends to generate outsized returns. However, the risk of value traps is always there and you're posing the right questions regarding industry dynamics and sustainability of cash flows to distinguish between the two.
I wonder if you'd consider expanding your definition of low PE to include situations where earnings are temporarily negative and/or there's an embedded growth opportunity that means current earnings are not representative of the company's earnings power. While such situations entail additional risks, they also can provide much higher upside if the bull scenario plays out.
I really like this series so far! Thanks for sharing your ideas!
I owned $CAR going into the GFC, after the Cendant break up. I think I'd paid around $15. Was cheap at the time based on the kinds of metrics you discussed above.
But the company had big warehouse lines that they used to fund their fleet purchases, as well as ABS facilities. As we all know the ABS market went into a deep freeze due to the troubles in the mortgage area. The market was pretty dubious about them surviving. CAR stock bottomed in early 2009 at about 35 cents. I bought a little more under $1 as a sort of YOLO (this was pre-YOLO) and unloaded in 2011 in the high teens.
It's up about 500x from the GFC low.
This is an industry I really never looked at from an investment standpoint given HTZ bankruptcy but your article really opened my eyes to the opportunity (and risks). Well done.
Cool series. SIXT is listed and family owned in Germany. They are quite strong in software and app dev - try download the app. The two brothers that took over mgt recently are just as ruthless with their staff as their mum and dad - what is good and bad as well. You can get a discount by buying the pref share that has no or just very few voting rights, so the family has control despite owning less than 50% equity. I see the same bear case logic for the industry, so I pass.
Thank you for articulating both the bear and bull cases.
Warrant is at 5 today, breakeven is 18.5, at around 32 warrants are more lucrative that stock.
Jan 26 calls are a dollar. much more upside if stock rallies to those levels. but no time/dividend protections.