In his recent annual letter to fund partners, Kase Capital’s Whitney Tilson disclosed the fund’s top holdings going into 2015. The fund’s third-largest position is Hertz Global Holdings, Inc. HTZ 0.6%. In the letter, Tilson specifically addressed his bullish overall case for the car rental industry.
Consolidation Creates Opportunity
Tilson believes that the car rental industry, much like the airline industry and the semiconductor industry, is now in a favorable position to capitalize on the recent consolidation in the space. Since 1999, the auto rental business has shrunk from six big names down to only three: Hertz, Avis Budget Group Inc. CAR 1.3% and Enterprise Holdings Inc.
Pricing Control
Tilson points out that he typically avoids industries such as these that are capital-intensive and tend to operate in an environment of aggressive competition, low margins, high debt levels and low returns on capital. However, now that the three big names control 90 percent of the U.S. industry and more than 98 percent of the airport business, Tilson sees a window of opportunity. One of the major benefits to consolidation is pricing control, and Tilson believes that once the three big names “start behaving rationally,” price hikes will soon follow.
Outlook
According to Tilson, higher prices could lead to a decade of improving revenue, margins and earnings growth for the three big names in the space. “This, combined with investors awarding these earnings a higher multiple, can lead to tremendous long-term stock returns,” Tilson explains.
Tilson is optimistic that the industry transformation may already be in its early stages. Avis’ recent quarterly earnings report indicated modest revenue increases, price increases and a big jump in earnings.
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