Description

Dollar Thrifty Automotive (DTG) is one of the largest rental car operators in the United States, and DTG has made one of the largest multi-month stock moves you're ever likely to see, increasing in value by more than 41 times since its early March lows. While DTG was priced for bankruptcy then and deserves to trade much higher now that bankruptcy no longer appears to be a near term risk for the company, I believe that the pendulum has swung back much too far in the other direction and that DTG now sports a ridiculous valuation and is a compelling short.

DTG reported $20,943,000 in EBITDA last quarter, roughly $84 million annualized. To be extremely generous I'll give the company every possible benefit of the doubt and project 2010 EBITDA coming in 50% above that $84 million annualized number (even though I see no reason to expect robust growth for DTG in 2010)- which gives us a  2010 EBITDA estimate of roughly $126 million

Now let's again be very generous and give the company an 8 times Enterprise Value/EBITDA multiple (I've seen research from Goldman Sachs valuing competitor HTZ at a 5 times EV/EBITDA multiple). That gets us to a "fair enterprise value" of around 1.08 billion. And, again, this is using EXTREMELY generous assumptions at every turn. DTG's actual enterprise value of 2.405 billion is more than 2.2 times that inflated fair value estimate.....an absurd valuation which should be not remotely sustainable over the long haul imho.  

I believe that DTG's last earnings report was perceived as very positive and partly helped the stock continue its meteoric rise. However, despite the bottom line EPS turnaround, it's important to note that revenues last quarter were DOWN 10.3% year over year...and that the company was only profitable because of much improved vehicle expense costs...a trend which may not be sustainable.

Below, I broke out the expenses as a percentage of revenue. You can see why margins are up while revenues are down. It is because vehicle expenses are way down because the auto industry was dying and looking to unload cars. You can see that last year under a more normal operating environment they only made money because of their derivatives. And now with revenues down 10% YoY, profits would be negative if not for the car expense reduction. Pre-tax margins were 5%. Normalize the vehicle expense and you have 2.3% + 2.3%, which would leave pre-tax margins at .4% versus 3.8% last year.

Not only is DTG ridiculously overvalued, but I believe that the company is fairly likely to raise money sooner rather than later to pay down their onerous debt load ($1.84 billion vs $260 million cash) which, if it happens, would be a downside catalyst for the stock. On August 4, DTG filed a S3 allowing them to raise up to $500 million. While there is no guarantee that they will follow through and dilute common shareholders, I think that this is very likely to happen in the near term given the incredibly massive move the stock has made this year, its ridiculous valuation, and the company's huge debt load.

Catalyst

1) DTG's valuation returning to earth

2) Possible dilutive offering.