Will Car Rental Stocks Experience A Bear Market Soon?
There has been a lot of volatility in the stock market this year, and much of that has been brought by the breakout of the novel coronavirus. The pandemic we are facing now proved to be a destabilizing trigger as many businesses are either closing down or filing for bankruptcies. For instance, once considered the gold standard for car rental companies, Hertz (HTZ Stock Report) is filing for bankruptcy after missing lease payments for its vehicles.
Due to national lockdowns across the globe, businesses that are associated with travel or businesses that require mobility were hit the hardest. Even though the impact of the coronavirus on the automotive industry remains bleak, there may still be reward for investors if the timing is right. It is worthwhile to take a look at how car rental services and second-hand car dealers are affected by the pandemic.
Car Rental Industry Gets Crushed By Coronavirus
The clock is ticking especially fast for one of the largest car rental companies. Hertz is in the midst of bankruptcy after missing its lease payments. The company is doing everything it can to stay afloat. Like the airline industry, car rental companies are not spared from the current pandemic either.
Another setback for the company was when Fitch Ratings placed a “Ratings Watch Negative” on $6 billion worth of Hertz asset-backed securities debt. If Hertz doesn’t receive government aid soon or is unable to convince the lenders to waive a potential default, Hertz may be forced to liquidate some or all of its fleet. It consists of hundreds of thousands of vehicles, to repay the bonds. If it happens, it could send used-car residual values even lower, further hurting the company’s already struggling balance sheet.
HTZ stock tanks more than 20% after reportedly hiring FTI Consulting for bankruptcy preparations. However, it’s likely that the company may not have been able to negotiate a deal with the lenders. While this is not yet conclusive, this could present a significant opportunity for auto stocks investors. But the bankruptcy is not yet definite. So will not be surprised by a stock rebound if the company manages to secure a loan extension.
Why Hertz Is Near Bankruptcy While Avis Stays Afloat
Avis Budget Group (CAR Stock Report) which also owns Zipcar, is in a similar debt position as Hertz. Avis was swift in reacting to the pandemic. The company negotiated an additional loan of $750 million. This gave them an extra cushion on top of their $1.6 billion in cash.
Unlike Avis, Hertz was not anticipating any debt financing requirements for its global car rental business for the year. However, the outlook changed when the value of the average used car fell 18% from the previous year. Since the fleet was used as collateral, Hertz must make up the difference due the declining values with cash.
For now, the best these car rental companies can do is to preserve cash. That’s so that they can survive the storms. But the question is, just how long can the cash last them? How will this business affect the rest of the auto sector?
“The risk for the auto sector occurs if the creditors of the debt using the rental vehicles as security decide to liquidate the fleet to repay the bonds,” said Ward. “A fire sale of a significant portion of the Hertz fleet could add to the price volatility in the used vehicle market.”
How Is Carvana Making A Comeback Amid The Current Pandemic?
Carvana’s stock (CVNA Stock Report) is on one wild ride. CVNA stock fell 74% around mid-March and then climbed over 150% in just six weeks. When the coronavirus panic sets in, even the shares of large businesses like Carvana are behaving like penny stocks.
Many consider Carvana as the Amazon of car retailing, a surging e-commerce business that’s not comparable to bricks-and-mortar rivals. Carvana is suddenly gaining all the attention as possibly one of the best auto stocks to buy now, thanks to its unique position as the largest online used car retailer in the U.S.
“We have more than doubled our revenue six years in a row,” says Carvana’s CEO, Ernest Garcia III. “In 2019 our differentiated supply chain enabled the fastest organic growth year of any automotive retailer in U.S. history.”
The massive resurgence of CVNA stock appears to be supported by the company’s business model. It’s tailored to the current environment. For example, if you want to buy a used car these days, Carvana is the way to do so. First, buyers practice social distancing. Then they are also able to obtain the car around $1,000 cheaper compared to traditional dealers. Carvana could really benefit from this pandemic to emerge as the winner in the car retailing sector.
