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Jim Cramer Gets It Wrong Again

October 13, 2009

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On his CNBC "Mad Money" show last Thursday Wall Street prognosticator Jim Cramer directed his stand up act at car rental stocks. With the same bluster in which he called General Motors "a $50 billion jobs program run by the union," he is now recommending Hertz stock. It's good news for the industry when someone as powerful as Cramer recommends a car rental stock, and indeed Hertz shares jumped the day after. But his reasoning, like his GM bashing, is misguided and simplistic. Following his logic on this stock pick could get you in trouble later.

 Cramer's analysis hinges on the strength of the used-car market. "We've reached a point where the used-car business may be the strongest business in the country," Cramer said. "It has almost totally eclipsed the rental-car portion of the rental-car business."

 He believes "Hertz has the most to gain from this trend," and thus recommends the stock over Avis Budget and Dollar Thrifty, both of which he puts on his Sell Block. Cramer says Hertz will sell 70 percent of its fleet on the used-car market (the rest being program cars), while "Avis will sell just 42 percent and Dollar Thrifty even less."

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 His logic is faulty on a few counts. First, rental companies aren't selling off fleet and absconding with the profits. Obviously, they have to go out and restock their fleets, yet companies are holding vehicles longer than ever before. Besides, last year saw the worst used car market in decades, yet profits are not better now than they were last year.

 Second, he's flat-out wrong about Dollar Thrifty: 95 percent of its vehicles are sold into the used car market, the highest percentage of risk fleet in the industry. (I am told that Dollar Thrifty sent a note to Jim Cramer and the "Mad Money" producers asking for a correction, though none has been issued yet.)  If his reasoning holds true, wouldn't DTG, a company with less total fleet to sell than Hertz but a proportionally smaller company, reap a greater profit percentage?

 And, while a strong used car market is certainly aiding the industry, it is far from the biggest factor that should lead to a buy or sell of stock. Small change items such as the ability of rental car companies to gain financing at reasonable rates, the ability to right-size fleets and personnel, the sustainability of pricing discipline, gains or losses in revenue per unit and fleet utilization as well as fluctuations in airline seat capacity and leisure and business travel all might be worth looking at in equal measure.

 Even if for misguided and simplistic reasons, at least Hertz can be grateful a Wall Street pundit is publicly singing its praises-further ammunition that Audit Integrity's bankruptcy risk claims are way off base.

Comments

  1. 1. David Pilcher [ October 15, 2009 @ 04:13PM ]

    Chris,

    I too happened to catch the Cramer disertation on the rental industry. I too was abit shocked that his research was pretty shallow. Your comments are right on target. A stronger case could be made for the rental industry actually beginning to make some money by operations and not just selling fleet. It is for sure that the credit market has imposed fleet discipline in an industry that has historically had little to none. Chasing market share and top line revenue with more fleet has been the determining factor of why rental rates have stayed too low for too long. Many of us hope that our industry has learned some long term lessons about supply and demand that we can continue to apply in the comming years. Can you imagine where some in the industry would be if the used market had not gained strength this year ? Blood bath comes to mind.

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Author Bio

Chris Brown

Executive Editor

Chris is the executive editor of Business Fleet Magazine and Auto Rental News. He covers all aspects of the fleet world.

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