Hey Zipcar, Suppose Car Rental – By Hour, By Day – is Just a Crummy Business?

Little Zipcar (ZIP), the upstart in the car rental space, and mighty Hertz Global (HTZ) got all up in each other’s face in a recent Bloomberg BusinessWeek article.

“They have a real problem,” Hertz CEO Mark Frissora, said of Zipcar, noting his New York vehicles outnumber Zipcar’s 35,000 to 2,000, and that he’s converting the entire Hertz U.S. fleet of 375,000 vehicles to the kind of remote access via a smartphone that currently lets Zipcar customers rent a car without ever directly dealing with a Zipcar employee.

“Everything they’re doing is stuff we were doing four or five years ago,” Zipcar CEO Scott Griffith shot back.

So, Zipcar and Hertz seem to be underestimating each other. But a bigger problem could be that they’re overestimating the business opportunity in by-the-hour car rentals. No doubt, for consumers it’s a great service to have shiny new Mini’s parked in urban neighborhoods and just waiting for someone who needs a car for a few hours. But that doesn’t make it a great business, and investors are at least halfway to figuring that out since Zipcar’s splashy IPO a year ago.

ZIP Chart

ZIP data by YCharts

Priced at $18 in the IPO, Zipcar shares immediately jumped to about $28 and have been steadily declining since.

Who knows? Millions of people -- who seem happy behind the wheel of their own car, or at least tolerate public transit, or God forbid, walk – may up and decide they need to regularly rent a car for a few hours. But even that wouldn’t guarantee Zipcar, or any of its competitors, a decent return on investment.

Hertz has been at this a while, and when you throw in all the debt a car-rental company carries to fund its fleet, the return on invested capital looks like a reason to avoid the business, not jump into it. The 10-year Treasury rate , without risk, scorches the Hertz ROIC.

HTZ Return on Invested Capital Chart

HTZ Return on Invested Capital data by YCharts

As anyone who sits on the airport shuttle bus, driving past the endless row of car rental joints, can observe, there are probably too many outfits in the business already.

Zipcar may be new as a listed stock, but the company has been around since 2000. After lots of losses, it broke into the black the past two quarters. Zipcar likes to break out its “established” markets – Boston, New York, San Francisco and Washington D.C. -- which of course are more profitable, to show the company’s real potential. Zipcar entered those markets between 2000 and 2005. We making or renting cars?

The Zipcar business model avoids rental agents, but it has its own complexities. There’s the cost of the in-car electronic equipment to replace the sales agent. The cars are parked, one and two and three at a site, all over cities, so fueling and servicing requires some moving around for Zipcar workers. And thus far Zipcar s relying on a membership model, like Costco (COST), charging $60 a year. Hertz is coming into the by-the-hour space with no annual fee.

Perhaps the biggest warning to investors is he zeal with which Zipcar CEO Griffith discusses his business. In the annual report, he claims without any supporting data, that each Zipcar takes 15 personally owned vehicles off the road. “We envision a future where car sharing members outnumber car owners in major cities.” He also remarks, “We are inspired to be part of a rare company that can do well by doing good.”

Amen on fewer cars, Brother Griffith. But the doing well part remains to be seen.

Jeff Bailey is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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