Deutsche Bank Says U.S. Car Rental Companies Need to De-Fleet (CAR) (HTZ)

Ahead of Q1 results from Avis Budget Group (NASDAQ: CAR) and Hertz Global (NYSE: HTZ), Deutsche Bank analyst Chris Woronka discussed the industry. In his view, consensus expectations are still too high. He also thinks "meaningful de-fleeting needs to occur."

Woronka explained, "As CAR and HTZ approach 1Q16 reports, we highlight that consensus expectations for both are very likely still too high. This despite an April 11 preannouncement of sorts from HTZ and intra-quarter checks suggesting further deterioration in pricing in March (neither co. gives quarterly guidance). While we don't think any of the numbers to be reported should come as a surprise to most, that doesn't mean the stocks won't encounter pressure anyway. We still see it as largely an issue of ownership dynamics (more inside). But--at some point--sell-side numbers will go low enough, pricing will trough, and there can be focus back on highly attractive valuations (we prefer FCF)."

Discussing capacity, the analyst said, "While 1Q disposition activity likely was hampered by tighter credit markets to start the year, coupled with unfavorable seasonality, we are now in a period where market conditions and seasonality are considerably better. While the absolute number of vehicles in car rental fleets typically grows as we head into the peak summer driving season, we want to see y/y declines on a percentage basis when 2Q results are reported in early August. We believe stepped-up dispositions are the only way—not just the best way—for the industry to stem pricing erosion (the magnitude of which has continued to surprise)."

Woronka continued, "Add to this the fact that the cost of holding an unrented vehicle is increasing (its initial purchase price was higher and its expected residual value is lower), and we believe the decision to offload cars is a fairly easy one. The question, of course, is will all three industry players come to the same conclusion? We’re of the view that this year, they will—clearly that was not true in each of the past few years."

Deutsche Bank has Buy ratings on both stocks.

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