ZIP

Water Cooler Investing
#1

I’m looking at this for a potential long. Longs aren’t my thing. I tend to focus on the negative and the risks. I always thought this business was a great idea. I think Millenials would rather spend money on an iPhone vs a fancy new car. So this just makes sense to me in the future when we don’t have enough money to afford cars, especially in major urban areas.

I’ve never gotten to use the service. So would like input from those of you who have.

If you live in an urban area 9 dollars an hour for a car rental seems like a solid deal to me considering you would pay much more to take a taxi. Hell, if could just drive myself to JFK for 9 dollars that would be an improvement over paying some guy from the third world 60 dollars and then another 10 in tip.

Earnings: Not particularly great here lately or in the near term. This is why the company isn’t trading at a big multiple. But there are plenty of expensive companies not making any money trading at huge multiples.

Market Cap: Only around 600 million dollars. Cheap enough to be bought out buy a competitor especially if it dips further.

Problems:

  1. Goodwill. Having a look at their BS I noticed a very large amount of Goodwill. Looking at the footnotes it appears it has mostly to do with an acquisition of Streetcar (UK). It’s a little more than a third of their Total Assets. No idea how to interepret this. But it would appear they overpaid.

  2. Capital Leases: They got tons of these. Lots of risk there. Lots of fixed asset risk in general.

  3. Competition. Although, their lack of profitability shouldn’t warrant much.

Good things:

  1. Increasing Sales

  2. Expansion possibilities. It seems a lot more people could be using this service than are currently doing so.

Some Science Fiction: With Google now testing their automated cars in Nevada. I would love, love, love them to buy out zip car. With the right engineers working together on this it could make life a hell of a lot better.

You could order the car right to your door on your smart phone instead of needing to walk to the wherever the car is parked. No Pakistani driver needed. No tip required. Siri, drive me to the airport. No more yellow cabs ever again.

#2

I dunno, dude. I’m a complete value investor cheapskate, so I rarely look at anything ‘sexy’, but I took a look. A few things I notice:

-Company’s growing sales at 35%, but most of this is purchased through acquisitions. That is expensive growth. I am almost 100% certain that any Zipcar exec would say, “Well, we’re not just buying sales, we’re establishing a network and scaling up the business and eliminating future competitors and attaining critical mass.” That may be, but ‘purchased growth’ needs to overcome a very high hurdle rate in order to be ‘worth it’. They appear to be paying pretty hefty premiums for the companies they’re buying. If that can’t finance these acquisitions internally (see below - doesn’t look like they’ll be financing much of anything till they turn profits), then the company is either going to be levered up further or shares you buy now are going to be diluted when they issue more. I’m not keen about either of those possibilities.

-As far as I can tell, ZipCar hasn’t turned an operating profit yet - or an accounting profit, for that matter (as judged by a quick read of their recent10-Q, 10-K and initial S-1). A roll-up strategy can be a great move, but I really like to see that the company doing the buying of its competitors is also the low-cost / most profitable operator. That’s probably not the case for Zipcar, but I’d want to compare them with some of the less sexy car rental services like Hertz, Avis, and so on to see just how profitable this business can be. Yes, I know, building a customer network / scaling up the business / heightening brand awareness / critical mass blah blah blah whatever. I really have a special loathing of companies that go public with only operating losses - taken as a category over the course of history, fast-growing-companies-with-operating-losses have absolutely crushed investers, historically.

-Valuation’s still high for me - despite a 60% drop over the past year. At present, you’re paying about 3.7x tangible book for this company, which is a lot to pay for a company that has only ever lost money, to date. You might say that book value isn’t the best yardstick for this company, but I would disagree there - this is an equipment rental company sorta built on a gym-membership model. The assets matter quite a bit, as does membership figures, as does the utilization rate of those assets - just like a gym. Incidentally, CTRL+F “utilization rate” didn’t turn up anything, but maybe they disclose their fleet usage statistics somewhere else?

I could do some further number crunching and see what expectations the street appears to have baked-in to the stock price at present, but honestly, I’d just pass until the price comes down further. At 2x tangible book, you might get better long-term results, but frankly, even then I wouldn’t love it. All-in-all, I’d steer clear of this. I may be proven wrong by history, but on balance of the probabilities (and what is investing but weighing probabilities and comparing them to price?) I see more to dislike about the stock at $10.65 than I do to love.

#3

I actually helped file the 503c for a non-profit competitor to ZIP, so have a good handle. I think that it is a good business model, but the difficult part is maintaining the quality of the inventory while not pissing off the customers. So, as opposed to a rental car agency that charges a bunch of money for a larger chunk of time ZIP shortens the duration of the leases. Fine, but the issue is that with greater driver turnover it can be easy for someone to mess up a car and for the damage to not be detected until well after the fact.

#4

So what you’re telling me is we’re on the verge of Johnny Cab? The future is here.

Now get your ass to Mars.

#5

We’re already there. I’m certain the only reason Google hasn’t announced it is because they know they have to push this through a million different safety, legal, union, government redtape and prove to insurance companies that it is actually safer to not have a pakistani talking on his bluetooth device to his terrorist buddy driving our yellow cabs.

I’ve been to Pakistan. I know how these guys drive. I’d much rather have google drive for me than a pashtun looking to martyr himself on the FDR.

Next, we’ll have chicks with three nipples. Progress!

#6

Yep there are bunches of these: i-Go

Think I’d rather just pay a competitive price than deal with hippies.

#7

Wats gonna become of my people then? :frowning:

#8

According to David Ricardo, the increase in technology will allow them to get retrained and get even better jobs.

#9

I have been short since $14 and am enjoying a nice gain. There is nothing particularly brilliant about my short thesis, it’s just that the math does not pencil on ZIP and I think management is overly bullish and in the process of falling on their faces (which as of the most recent quarter appears correct).

At $14, the company was trading at 7x tangible book. The goodwill is irrelevant, you need to look at tangible – all the goodwill demonstrates is that they got bagged when they bought a competitor(s).

Who in their right mind would pay 7x tangible for this company? What do they have? They have some depreciating branded cars and some locations, which do not offer a competitive barrier to entry. And by the way, the competition is coming for them in a very public way. You have the CEO of Hertz publicly saying that they will beat ZIP with better economies of scale and a larger fleet. It is happening already and will continue to happen through FY12-13 as HTZ installs electronic gizmos in their cars and further rolls out their huge existing fleet into per hour rentals. They’ve had some problems with the website but it’s their market eventually, or their’s and Avis, etc., etc.

I do think ZIP will have a place in the market, but the company has not yet proven itself to be economically viable and the CEO is a clown show when he says that increased competition is going to help. Are you on drugs, dude? If you look at HTZ, the company already has very low returns on capital – ZIP is actually going to do worse over time most likely than HTZ given their small size. There is pretty much zero chance that increased competition is going to help them. The market is already established – everyone and their mom knows about Zipcar – so the idea that new entrants will expand the concept is delusional.

Someone might buy it out, but not at 7x TBV with slowing growth. Their Europe growth story sounds like a joke too – Europe has viable public transportation (unlike most of the US), so the market there is even smaller than in the US on a per capita basis, and people in Europe are gayer (a technical term – no stigma against riding Vespas and so on). I have not done serious work in the US but think it is likely they are overstating their eventual penetration rates. ZIP is a college and big city concept and NYC / SF / Boston / DC / etc. will probably saturate faster than most investors think, especially when competition starts. HTZ should gain share and create pricing pressure through brand / higher marketing budget / lower pricing scheme (including no up front fee). All of the people I know who use ZIP admit that they would just choose whichever service has convenient locations and lowest pricing (it’s a commodity at the end of the day). Some “Zipsters” will stay loyal, but most people don’t care. ZIP’s competitive response is going to be limited given that they are already not profitable and have a large amount of fixed assets and fixed leases.

I usually do much more detailed work than this, but ZIP seems like such a collossally bad investment at $14 that I was willing to take a small position “on form.”

Not sure where SuperSad is coming up with 3.7x TBV, since the recent 10-Q shows total equity of $222.6mm less 104mm of goodwill less 4.6mm of intangibles, for a tangible equity value of $114. Market cap today is $634 / 114 = 5.6x, which still seems very expensive. Maybe I missed something and it really is 3.7x, but that’s still too high.

I would close out the short over the next couple of quarters if ZIP growth re-accelerates organically or HTZ does not make incremental progress.

I hate this stock and hope it goes to zero. Few stocks have ever inspired as much revulsion in me as ZIP.

#10

Any chance this goodwill gets impaired? It’s european which has to count for double gilbert grape impaired these days?

I don’t like shorting something like this because of what happened with GRPN yesterday. They have one upbeat earnings session where management raises guidance and you lose your fckin shirt. I feel much more comfortable once their valuation is already > 10 billion because then it is hard for the market to just raise it another 5 billion.

#11

Agree strongly with your fundamental analysis. Agree on the tangible book portion. Where are you getting the market cap of $634mm? I just pulled it up on bloomberg when I had done this and just re-checked it now and have $398mm. That over our tangible book of $114mm gets us our 3.5x tangible book (stock price was $10.65 when I did this, so it was a higher multiple then). Am I missing something?

Not trolling, but genuinely can’t get to your answer with the figures I’m using. Are there more than 39.8mm shares out? That times our $10 closing price today gets me my 398mm market cap figure I’m using.

#12

BV of equity of $223m is still less than mkt cap of almost $400m, so they still have a ways to go before impairment becomes an issue.

#13

comment doens’t gel with goodwill impairment analysis. goodwill is impaired if the cash flows assumed in obtaining the goodwill has fallen materially over a period of time and are not likely to reverse.

you can basically do your own goodwill impairmen analysis based on ROI/ROA. just cause they didn’t write it down doesn’t mean its there…

also, goodwill impairments doesn’t mean anything since it is after the fact and a non cash charge. if the company had written down 100% of its goodwill, that wouldn’t change the underlying existing business one bit…

#14

Frank’s correct, as far as I know. Goodwill impairment doesn’t have to do with where the stock trades relative to book. Goodwill impairment has to do with whether or not they’re earning an “acceptable return” on the goodwill. For a company like (everyone’s favorite example!) Coke, their goodwill really does earn a decent return - they’ve got a lot of valuable intangibles that don’t show up on the balance sheet, and these “hidden assets” enable the company to earn awesome returns on capital. For a company like ZIP, I would bit anyone here that every dollar of goodwill they have on the balance sheet is written down to zero within the next 5 years.

#15

^ Actually, per what used to be known as SFAS 142, the first step a company needs to take to determine if a potential goodwill impairment exists is compare the fair value of the company to the carrying amount (book value). So, in this case, the FV>BV, therefore no impairment exists.

I haven’t done a thorough analysis of ZIP, but if the company is broken into multiple reporting units, that changes things. But testing for goodwill impairment with single reporting unit companies with an observable market price is as simple as I just described. It would typically be expected that a company (or the valuation firm that they hire) use other approachess to confirm that the quoted price is reasonable and should be relied upon, which very likely will consider the expected cash flows, but having done this work professionally for way too long, I can say with certainty that it is rare that the expected cash flows would produce a value much lower than the mkt cap implies.

#16

Good catch. I use a FactSet datastream that populates into a custom template. Did not check with Bloomberg, but did do a quick check on Google Finance when I initially went short (have a shared Bloomberg in another room that I don’t always feel like waiting in line for). Interestingly both FactSet and Google are wrong with the same numbers. If you go to Google right now you can see that the stock is trading at $10.05 with diluted shares of 63.43mm for a market cap of ~$640mm, which is a P / TBV multipe of 5.6x. Prior to the decline it was closer to the mid-800 range (on these apparently wrong numbers), which was a 7x TBV multiple.

I actually think your numbers are correct but I am not sure why two sources have the same incorrect data (which is troubling, I will need to start triple checking everything from now on haha).

Doesn’t really change the thesis much, as the stock is still expensive at 3.7x. I am going to remain short for now, though this clearly has a lower margin of safety on the short side. The best shorts occur during the rotation between investor “camps” as momentum and growth players dump shares due to slowing momentum or disappointing growth, but where metrics remain too high for value players to get involved. ZIP clearly fits that category and the stock cannot get out of its own way as fast money investors puke the shares. How much longer that continues remains to be seen (although clearly the chart shows the trend is ongoing). The Street has some crazy numbers out there (one analyst has 2018 estimates that show the company doing 1.3B of revenue with 230mm of EBITDA – are you freaking serious Oppenheimer?! Who forecasts out that far??? lol), so I don’t expect the stock to get down to 1x TBV any time soon (which still may not be a value) until the numbers are proved to be patently false (if they are proven that way). That said, some “value” investors will likely step up to the plate at some point, possibly in the 2x+ book range. And of course if growth re-accelerates the stock will go up regardless of the valuation.

#17

Ah, mystery solved. Thanks for explanation. Good luck on your trade - keep us posted here. I don’t think I’d ever buy ZIP (at least not in the foreseeable future) but I am very interested in how the stock performs, as it’s an interesting gauge of market sentiment. As for myself, when stuff like ZIP and GRPN start going public, I get reaaaaaaaaaally leery.

#18

I agree, I think the IPO market is one of the best leading indicators of future stock market performance. The stuff that went public in 2007 would make your head spin – Greek shipping companies leveraged to the hilt, SPACs that did incredibly stupid things (one that I remember being named Asia Time Corporation or something like that managed to blow up and I think was a complete wipe out – who buys a watch parts company in China with a SPAC? lol), etc., etc. I did a project post-Lehman in which I looked through all of the 2006-2008 IPOs to find orphans (good companies with no analyst coverage that were dumped en masse during the panic). Most were dogs but there were some real gems as well. In general, stuff that goes public and blows up within the first 2-4 years is a good place for value investors to look (not the ZIPs and GRPNs of the world though).

I’m wondering if the ZIP thing might be due to some shelf registration or something as they are likely going to have to raise equity soon and may have filed for that. It could be that the 63M is the DILUTED diluted count for the post-secondary offering. That’s all I could think of. Did not scan through for a shelf though so that may not be the case. Can’t think of another reason that two data sources would have the same wrong number.

#19

could be float vs. outstanding…

either way…what do you value investors like at the moment? i’m in the charlie munger type so i don’t buy into cheap stuff for the sake of cheapness which i find most value guys do…

#20

indeed, but will they allow one way rentals and airport dropoffs ?

amen to that