Tidbits

[Sweet]

30 minutes ago, Spekulatius said:

Besides, all UK stocks suck, doesn't matter what business they are in (tongue in cheek comment)

Some truth to that though, they are perma low multiples.  Economy has been stuck since 08 really, as has much of Europe.

[thowed]

Good UK stocks were fine from 08, it's Brexit in 2016 that messed things up, I'd say, though some of the best companies have continued to do well, e.g. Games Workshop.

[Sweet]

You can’t possibly look at the performance of the FTSE 100 since 08 and say it was fine until Brexit.  It was terrible before and it’s terrible after.  European indexes have been terrible too from that time.  Overlay just about any European index on the SPY and it’s pretty much the same story.

 

 

[Spekulatius]

1 hour ago, Sweet said:

You can’t possibly look at the performance of the FTSE 100 since 08 and say it was fine until Brexit.  It was terrible before and it’s terrible after.  European indexes have been terrible too from that time.  Overlay just about any European index on the SPY and it’s pretty much the same story.

 

 

Yes, it was the GFC that messed things up. The FTSE has a lot of financial exposure and literally all large financials were significantly impaired from dilution. There is also very little tech exposure, which has been driving the returns in US indices.

Edited January 5 by Spekulatius

[Sweet]

Has anyone looked at the rental car industry lately.  Avis and Hertz both trade at a PE of 4.  
 

GAAP income has been decent these past two years but before that it’s been very patchy so I understand why the market has valued it so low.

 

Free cash flow is abysmal, both companies are seeing large outflows of cash, and both have a large amount of debt.

 

Not quite sure how they operate their business but anecdotally I rarely see old cars at these companies so they must have a very large capital outlay to buy these new, or a large amount of leases.

 

I’d just pass on this normally but I remember Buffett offered to buy Enterprise.  Granted it’s probably the best run rental company but the economics of the industry can’t be that bad if Buffett wanted a slice back then.

 

Will dig a bit deeper because I want to understand what I’m looking at.  I’d use these companies quite regularly too.  My gut says there isn’t an opportunity here… but I could be wrong.

 

 

 

Edited January 10 by Sweet

[Saluki]

2 minutes ago, Sweet said:

Has anyone looked at the rental car industry lately.  Avis and Hertz both trade at a PE of 4.  
 

GAAP income has been decent these past two years but before that it’s been very patchy so I understand why the market has valued it they way it has.

 

Free cash flow is abysmal, both companies are seeing large outflows of cash, and both have a large amount of debt.

 

Not quite sure how they operate their business but anecdotally I rarely see old cars at these companies so they must have a very large capital outlay to buy these new, or a large amount of leases.

 

I’d just pass on this normally but I remember Buffett offered to buy Enterprise.  Granted it’s probably the best run rental company but the economics can’t be that bad if Buffett wants a slice.

 

I'd say it's a business that is a melting ice cube.  It's being disrupted by Lyft and Uber.  You don't need to rent a car to get around town now (and worry about returning it and refilling the tank and getting it damaged and paying for insurance). Their is also a big outlay of capex/expenses every year because people don't want to rent old cars, so they have to buy them and sell them off after 3 or 4 years and buy more. 

 

If you want to see something fascinating, look at the average age of a truck in Uhaul, you will think it's a typo.  They rent them for a decade, charge you insurance (which is through a company owned by them), and will charge you for "damage" to the truck, but won't fix it. They just circle the damage and if anyone buts a new ding on the same panel, they get charged again, even though they don't fix it.  It's a much better business model, but I don't trust the management. 

[Sweet]

13 minutes ago, Saluki said:

 

I'd say it's a business that is a melting ice cube.  It's being disrupted by Lyft and Uber.  You don't need to rent a car to get around town now (and worry about returning it and refilling the tank and getting it damaged and paying for insurance). Their is also a big outlay of capex/expenses every year because people don't want to rent old cars, so they have to buy them and sell them off after 3 or 4 years and buy more. 

 

If you want to see something fascinating, look at the average age of a truck in Uhaul, you will think it's a typo.  They rent them for a decade, charge you insurance (which is through a company owned by them), and will charge you for "damage" to the truck, but won't fix it. They just circle the damage and if anyone buts a new ding on the same panel, they get charged again, even though they don't fix it.  It's a much better business model, but I don't trust the management. 

Uber and Lyft definitely denting the area to some degree, but speaking from my own experience, I much prefer to rent a car and go where I want when I want.  I don’t find waiting for an Uber convenient and if I am using the car multiple times a day not worth the cost either.  One thing though, it is a headache sorted the insurance etc, if you aren’t prepared they’ll take a good chuck of money from you.  I recently rented from Avis, small SUV for over two weeks.  All in I paid about $600 which I didn’t think was too bad.  Will check out uhaul - cheers.

 

 

Edited January 10 by Sweet

[ValueArb]

1 hour ago, Saluki said:

 

I'd say it's a business that is a melting ice cube.  It's being disrupted by Lyft and Uber.  You don't need to rent a car to get around town now (and worry about returning it and refilling the tank and getting it damaged and paying for insurance). Their is also a big outlay of capex/expenses every year because people don't want to rent old cars, so they have to buy them and sell them off after 3 or 4 years and buy more. 

 

If you want to see something fascinating, look at the average age of a truck in Uhaul, you will think it's a typo.  They rent them for a decade, charge you insurance (which is through a company owned by them), and will charge you for "damage" to the truck, but won't fix it. They just circle the damage and if anyone buts a new ding on the same panel, they get charged again, even though they don't fix it.  It's a much better business model, but I don't trust the management. 

 

Hertz revenues are down about 10% over the last decade while Avis is up 50%, combined their revenues are up about 20%. That's raw numbers, no idea how much acquisitions and selling off subsidiaries alter it. I'd bet Enterprise has grown significantly more.

 

That said there is no doubt its a slow growth industry, but I doubt it will shrink much. Last summer on my annual family drive to Oregon my alternator on old unfaithful (2010 Cayenne) went out in a little arizona town so far from a porsche dealer that my only choice was to send it to a scrap yard or pay $1,200 to tow it back to Phoenix. I ended up towing it, and then rented an Audi Q5 from Enterprise for three weeks to cover the trip. Uber wasn't an option.

 

People will still need to rent for longer periods. Even business travelers will prefer a rental if they in a city long enough and have a few stops. The part of the business that ride-sharing takes away is probably the smallest part of their business, short trips over a short period. If self-driving cars ever become a thing, it might take more of their market, but then you have some questions. Who will own the cars, who will maintain the cars, who will clean the cars, check for damage and repair the cars?

 

The answer is almost certainly, rental car companies.

 

[Spekulatius]

I don't think car rental is a melting ice cube. Ride sharing works, but if you need to do a lot of trips , then calling and waiting for Uber can become a hassle. For vacation trips and if you cover multiple locations, Ride shareing does not work either.

 

Negative cash flow for fleet expansion is a good thing, if the ROIC is high. When the business stagnates or shrinks, the investment in new cars can drop and FCF should increase which creates a nice countercyclical  aspect to the business.

[bizaro86]

I did a trip recently where I had a rental car for one piece and used Uber for the next piece. Waiting for Uber got old pretty fast. Especially the once where it ended up taking over an hour and a half - granted that was leaving an NFL game, but even still... 

 

In terms of the 2 public choices I think Avis is better run, but Hertz has some immediate upside as next year they probably won't buy tens of thousands of EVs that immediately depreciate because of lower MSRPs, so growth will be easier for them.

 

I also really like (and own) the Hertz warrants. If you think Hertz is a good long term buy the warrants seem like the obvious play to me.

[Sweet]

Totally agree on rental vs Uber.  There is some overlap but they are different markets too.
 

I was surprised to find that Avis have reduced their share count by 50% since Jan 2019.  They have been very aggressive at buying back stock.  The website of Avis is investor friendly easy to find recent filings and calls and press releases.
 

Not really looked at Hertz yet, wasn’t aware there were warrants.

[Spekulatius]

2 hours ago, Sweet said:

Totally agree on rental vs Uber.  There is some overlap but they are different markets too.
 

I was surprised to find that Avis have reduced their share count by 50% since Jan 2019.  They have been very aggressive at buying back stock.  The website of Avis is investor friendly easy to find recent filings and calls and press releases.
 

Not really looked at Hertz yet, wasn’t aware there were warrants.

Got to spin the wheels a bit on $CAR. Those buybacks do get my attention:

 

 

Went from ~90M shares in 2016 to 37M shares. Absolutely fascinating. Looks like a turbocharged version of $AZO.

[Sweet]

17 minutes ago, Spekulatius said:

Got to spin the wheels a bit on $CAR. Those buybacks do get my attention:

 

 

Went from ~90M shares in 2016 to 37M shares. Absolutely fascinating. Looks like a turbocharged version of $AZO.

Yes, that’s was surprising to me too, particularly given the free cash flow situation.  Management have said they will continue because they believe share price does not reflect the value of the business.

 

I’m interested too, but the trouble is I don’t understand the accounting even though think the business model is fairly straight forward.

 

The buy cars from suppliers, probably at a discount, they keep the cars for two years in nearly every case and they sell it on.  Their calculation is per car as far as I understand, depreciation is on average $300 a month per car then they have debt financing which is calculated at $167 per car.  Utilisation of rental cars is 67-71% depending on the location.  Don’t seem to be overstaffed, was wondering where all the staff where when I recently rented.  Should be a decent low margin business in there.

[focused1]

I think hertz is an interesting idea and want to learn more.   The stock is recapitalizated post bankruptcy emergence and trading at lower levels than before, but they have essentially done a levered recap via buybacks. When you look at how they run the business; you pretty much know the 2050 warrants offer leverage on leverage on leverage (leverage from inside the OpCo that is earning a spread on cars purchased with a securitization, leverage from being a levered recap at the parent level with non secured debt, and leverage from the long term warrants that have various anti dilutive protections).  And the management incentives are very equity oriented so you know they are going to try to make the free cash flow to equity juiced.  This seems like it could be a chapter in You can be a stock market genius   Baby needs some shoes?

Edited January 12 by focused1
Fixed typo

[Sweet]

I don't think these are terrible companies.  In the case of Hertz they went bankrupt from quite an extraordinary event.  And they are buying back shares quite aggressively too.

 

Oh and welcome focused1

 

Edited January 12 by Sweet

[Spekulatius]

I am more interested in CAR than in HTZ - just based on how they seem to think based on CC transcripts but they both could be great bets.

 

What is fascinating about CAR is their bonkers capital returns. They almost retired 2/3 of their shares and even so the shares have more than tripled, the market cap is actually not up that much. Bonkers, since the business is so much more profitable than in 2016. Even paid a $10 special dividend this year.

 

The capital structure is also something to behold. $6B in market cap and they slapped $4.64B in corporate debt on it. The next layer is secured debt for the cars themselves - ~$17.5B. So it's leverage and top of leverage and just beautiful as long as it works and a zero if they run into trouble like like HTZ did in 2020. I think Europcar also went teats up and needed to be recapitalized. So you really need a management team that knows what they are doing.

 

We should probably open a thread on those rental car co, as there sure is more input.

[mjm]

1 hour ago, Spekulatius said:

I am more interested in CAR than in HTZ - just based on how they seem to think based on CC transcripts but they both could be great bets.

 

What is fascinating about CAR is their bonkers capital returns. They almost retired 2/3 of their shares and even so the shares have more than tripled, the market cap is actually not up that much. Bonkers, since the business is so much more profitable than in 2016. Even paid a $10 special dividend this year.

 

The capital structure is also something to behold. $6B in market cap and they slapped $4.64B in corporate debt on it. The next layer is secured debt for the cars themselves - ~$17.5B. So it's leverage and top of leverage and just beautiful as long as it works and a zero if they run into trouble like like HTZ did in 2020. I think Europcar also went teats up and needed to be recapitalized. So you really need a management team that knows what they are doing.

 

We should probably open a thread on those rental car co, as there sure is more input.

I would recommend the warrants if you are looking at HTZ.

[Sweet]

Agree the two companies would benefit from their own thread.  The use of debt is a bit disconcerting.  Avis did survive the pandemic when travel ground to a halt.  No mean feat.

[Sweet]

On 1/12/2024 at 12:37 PM, focused1 said:

I think hertz is an interesting idea and want to learn more.   The stock is recapitalizated post bankruptcy emergence and trading at lower levels than before, but they have essentially done a levered recap via buybacks. When you look at how they run the business; you pretty much know the 2050 warrants offer leverage on leverage on leverage (leverage from inside the OpCo that is earning a spread on cars purchased with a securitization, leverage from being a levered recap at the parent level with non secured debt, and leverage from the long term warrants that have various anti dilutive protections).  And the management incentives are very equity oriented so you know they are going to try to make the free cash flow to equity juiced.  This seems like it could be a chapter in You can be a stock market genius   Baby needs some shoes?

 

 

These companies are going to be very interest rate susceptible given the debt they hold. I was looking at the Avis long term options, the pricing is terrible so I moved on.   

 

I then looked at the Hertz warrants which are just crazy instruments.  They allow you to exercise them at $13.80 and they are good until 2051 - yes a 28 year call on the company.  They benefit indirectly from Hertz buying back stock, Hertz have reduced their float by 35% since June 2021.  The warrant is also structured such that if Hertz pays a dividend the exercise price of the warrant will drop too.

 

Sure, if Hertz goes BK again you are probably toast.

 

Edited January 16 by Sweet

[Saluki]

'The Big Con': If You Can't Avoid It, Avenge It : NPR

 

I'll post a book recommendation in the book section, but if you don't want to read the book, this is still a fascinating story.  He literally tracked down the guys who conned him in Texas by travelling across the country with a suitcase full of disguises and a couple of revolvers.  

[ValueArb]

10 hours ago, Sweet said:

 

 

These companies are going to be very interest rate susceptible given the debt they hold. I was looking at the Avis long term options, the pricing is terrible so I moved on.   

 

I then looked at the Hertz warrants which are just crazy instruments.  They allow you to exercise them at $13.80 and they are good until 2051 - yes a 28 year call on the company.  They benefit indirectly from Hertz buying back stock, Hertz have reduced their float by 35% since June 2021.  The warrant is also structured such that if Hertz pays a dividend the exercise price of the warrant will drop too.

 

Sure, if Hertz goes BK again you are probably toast.

 

 

 

This piqued my interest, but Hertz just looks terrible to me. It is generating a ton of negative cash flow and buying a ton of cars. And while growing still not back to 2019 revenues. Maybe all the cars its buying is for growth and recovery after bankruptcy but I can't figure out which is growth cap ex and which is replacement cap ex. And revenues only up 8% YOY.

 

Other softer negatives. It back a ton of shares at over $11 last year while it trades for $8.43 now. Negative tangible net worth and ton of debt. Lastly I like that they bit the bullet on Tesla if it wasn't working out for them instead of getting anchored on a big public idea, but the fact they bought a huge number of EVs without fully testing their cost and usage impacts seems like a clown show type of decision.

[Sweet]

7 hours ago, ValueArb said:

 

 

This piqued my interest, but Hertz just looks terrible to me. It is generating a ton of negative cash flow and buying a ton of cars. And while growing still not back to 2019 revenues. Maybe all the cars its buying is for growth and recovery after bankruptcy but I can't figure out which is growth cap ex and which is replacement cap ex. And revenues only up 8% YOY.

 

Other softer negatives. It back a ton of shares at over $11 last year while it trades for $8.43 now. Negative tangible net worth and ton of debt. Lastly I like that they bit the bullet on Tesla if it wasn't working out for them instead of getting anchored on a big public idea, but the fact they bought a huge number of EVs without fully testing their cost and usage impacts seems like a clown show type of decision.

Yep, it’s why I don’t have a position in any of them yet, and may never.

 

Avis gives a breakdown of its cost on average per car and you can work out roughly how much it is to replace its fleet.  It pegs the costs at a long term average of $300 per car per month.

 

Cars in Avis are replaced every two years.  So the average cost of a car for two years is 300 x 24 = 7,200, before they are sold on.

 

I think both these companies probably expanded very aggressively with debt, the payment of which drags.

[Spekulatius]

4 hours ago, Sweet said:

Yep, it’s why I don’t have a position in any of them yet, and may never.

 

Avis gives a breakdown of its cost on average per car and you can work out roughly how much it is to replace its fleet.  It pegs the costs at a long term average of $300 per car per month.

 

Cars in Avis are replaced every two years.  So the average cost of a car for two years is 300 x 24 = 7,200, before they are sold on.

 

I think both these companies probably expanded very aggressively with debt, the payment of which drags.

The cars were always financed with debt, but what really surprised me when I looked at both Hertz and Avis balance sheet that they added some corporate unsecured debt at the company level. So these business are a really a pile of unsecured debt on top of a huge pile of secured debt with a sliver of equity. The stocks seem very much like options themselves. Great if it works, but a zero if it doesn’t.

Edited January 17 by Spekulatius

[Sweet]

1 hour ago, Spekulatius said:

The cars were always financed with debt, but what really surprised me when I looked at both Hertz and Avis balance sheet that they added some corporate unsecured debt at the company level. So these business are a really a pile of unsecured debt on top of a huge pile of secured debt with a sliver of equity. The stocks seem very much like options themselves. Great if it works, but a zero if it doesn’t.

I don’t understand how these companies aren’t very profitable businesses and why they continue to carry so much debt.  Hard to invest when I can’t square that off.

 

 

[Spekulatius]

6 minutes ago, Sweet said:

I don’t understand how these companies aren’t very profitable businesses and why they continue to carry so much debt.  Hard to invest when I can’t square that off.

 

 

Well, they are profitable. I understand why the finance their cars, it's secured debt and relatively cheap. Cars can be relatively easily liquidated, so they can reduce leverage if the business slows by selling off cars, which they do every fall going into winter (because there is less seasonal demand).

 

What I don't get is why they add so much corporate debt. I guess the answer is because they can and to juice returns on equity.

 

FWIW - Sixt (family controlled) runs a much less levered model with a substantial equity layer. I guess they more concerned about not going to zero than to juice the equity returns;

https://about.sixt.com/en/investor-relations/