Car Rental Outlook Getting Better, MKM Says

Both Hertz Global Holdings Inc (NYSE: HTZ) and Avis Budget Group Inc. (NASDAQ: CAR) indicated pricing weakness in 1Q. MKM Partners’ Christopher Agnew maintained Buy rating for both companies, saying that the outlook seems to be improving due to industry actions.

Hertz mentioned during its business update on April 11 that the 1Q pricing environment had been significantly challenging due to excess capacity. Analyst Christopher Agnew said that the pricing weakness indicated by Hertz and Avis Budget was not fully reflected in the consensus estimates.

Addressing Excess Capacity

“The industry has, however, taken proactive actions to rightsize fleet in March and April and we believe we are starting to see some benefits. Therefore, we are encouraged as we head into the strong leisure demand period over the summer,” Agnew wrote.

April Pricing Trends Indicate Improved Fleet Situation

Checks indicate that pricing was stabilizing in the 7-10 days prior to the rental date in mid to late April. This is indicative of supply and demand being more in equilibrium, the analyst mentioned.

April Manheim Encouraging

Used car prices rose in April from the prices recorded in March, “which likely indicates that selling pressure from excess rental fleet in March has largely abated,” Agnew said. He added that although the index for wholesale used vehicle prices was tracking down y/y, it seems to be “back on trend and in-line with existing expectations for fleet costs.”

The price targets for Hertz and Avis Budget have been maintained at $16 and $38, respectively.