Insider Buying at this Company. Time to Get In?

As the year comes to an end, and I start preparing my 2013 investment strategy, one company draws my attention in a very particular way. Zipcar (NASDAQ: ZIP) is considered the world’s leading car-sharing network with more than 10,000 vehicles and 767,000 members across 20 major metropolitan areas, 300 college campuses and counting.

I became interested in this company back in July of this year and decided to put it on my radar to learn more about their business model and the potential ahead. As the weeks passed and the results from operations for 2Q12 were announced, investors punished the stock sending it from $10.63 on the day before the earnings release to $6.75 just one day after. During the three following months it continued to decrease its price tag to as low as $6.00 a couple of days before the third quarter earnings release.

On the 3Q12 earnings call, several good pieces of information were given. Among them; full year guidance was raised (not by much but it’s always good to see a company raise its outlook), launched their 20^th major market in Miami, continued European expansion by acquiring Avancar (Spain’s largest car sharing service) and Carsharing.at (a car sharing network based in Austria). But the main highlight of the earnings release was in my opinion the fact that earnings per share for the quarter were $0.10 and the company now expects to be profitable for the first year ever.

This information gave investors more confidence about the company. Its stock has come up to $8.41 as of today’s close representing a gain of +40% in a little over a month. But can we still expect more upside on Zipcar or is it too little too late?

Here’s a closer look at the fundamentals of the company, its competitors and the news and events I consider of importance to make that decision:

Fundamentals.

Revenue has been increasing consistently over the past years from 131 million on 2009 to 241 million on 2011 and it has registered 271 million over the last 4 quarters. Earnings per share have improved as well, while on the past 3 years the company reported losses it now stands at $0.10 over the last 4 quarters. You can see that in the tables below.

Revenue in Million $
	2012	2011	2010	2009
1Q	59.13	49.13	33.24	25.76
2Q	70.81	61.56	45.96	32.08
3Q	78.23	68.06	54.79	37.54
4Q	N/A	62.90	52.11	35.80
Total		241.65	186.10	131.18

Earnings per Share $
	2012	2011	2010	2009
1Q	(0.08)	(0.95)	(2.37)	(1.45)
2Q	(0.01)	(0.17)	(0.95)	(0.83)
3Q	0.10	0.02	(0.39)	(0.60)
4Q	N/A	0.09	(0.17)	0.61
Total		(1.01)	(3.88)	(2.27)

I believe the company has started to get momentum on the earnings per share, and in my opinion it will continue like that because some of their already mature markets (Boston, N.Y., Washington D.C. and San Francisco) continue to improve and are already reporting net profits.

During the participation of Zipcar at a J.P. Morgan SMid Cap Conference on November 29, 2012 the company presented a case study; San Francisco specifically. This market was launched during the third quarter of 2005 and it broke even three years after and reported a net income of 19% of revenue by 2010 (Information can be found in the company's website).

When it comes to the balance sheet and the health of the company, several pieces are worth mentioning; Cash per share for example has decreased about 62% since its IPO back in 2011, from $2.81 to $1.08 as of the most recent quarter. Debt-to-equity ratio although is manageable at a 0.85 it has to be contained lower than 1.0 if they want to keep the investors’ confidence.

Fundamentals have been improving and apparently getting to a point where profits will be present in the near future. Mature markets are reporting profits and relative new markets will become mature in the very near future which could mean better EPS in the coming quarters.

Competition.

We can’t just ignore the competition that any company faces and just dive in the stock because of improving fundamentals. Being aware of the risks and preparing for them can give us a little advantage over those who don’t take the time to look around.

Hertz (NYSE: HTZ) whose headquarters are based in New Jersey is one of the leading car rental companies in the world with more than 8,500 locations across 146 countries. In 2008 they launched what is now known as Hertz on Demand, a pay-as-you-go membership aimed to compete directly with Zipcar. By the second half of 2011 Hertz on Demand accounted for 85,000 members and 700 vehicles over 500 locations.

Although they’re still very far from Zipcar when it comes to any of the metrics (locations, vehicles or members), we have to consider the fact that Hertz can flood the market with vehicles and compete more aggressively if decided because they have the resources to do so.

Avis Budget Group (NASDAQ: CAR) is another big player in this industry. At this point, Avis does not have a pay-as-you-go membership or rents by the hour. However, a close eye must be kept to them, since, as Hertz, they too have the resources to rapidly enter the field. Avis currently has over 10,000 rental locations across 175 countries around the world.

Let’s now compare the fundamentals of these three companies to better understand the possibilities of Zipcar to grow and compete.

Results from Operations (Most Recent Quarter)
	Revenue x Share	EPS	Gross Margin (%)
ZIP	$1.96	$0.10	5.55
HTZ	$5.98	$0.55	14.67
CAR	$20.39	$2.38	11.98

It is very clear that Zipcar has a lot of work to do when it comes to its Profit & Loss statement. Having a gross margin of less than 6% is about half of Avis and a third of Hertz. Management needs to act on this end quickly or continue to show improvements if they want to compete better in the industry.

Balance Sheet Comparison
	Book Val. (mrq)	Cash x Share (mrq)	Debt/Cash	Debt/Equity
ZIP	$10.75	$1.08	4.53	0.85
HTZ	$6.04	$1.08	37.52	6.67
CAR	$7.43	$5.21	13.92	9.75

Looking at this numbers above the story is very different right? The two major companies have a lot of debt on their books that can stop them from investing heavy and quickly enough to compete or expand in this market (hourly rentals). Zipcar on the other hand, has a better health, thus allowing them to continue expanding quicker and without an immediate threat to their business model.

Valuation Comparison
	P/E (ttm)	P/S (ttm)	P/B (ttm)	Market Cap
ZIP	84.10	1.24	0.78	0.34B
HTZ	26.11	0.63	2.64	6.78B
CAR	15.81	0.28	2.57	2.04B

Valuation is my opinion the most interesting comparison of all of them. Note that even with a much higher P/E multiple (ZIP) the price to book is much smaller than its competitors. If Zipcar is able to maintain its trend on revenue and start having a consistent record of positive EPS we will see a tremendous upside on the price of the stock.

News, Events & Other Interesting Facts.

After the last earnings release there has not been much on the news or events for Zipcar other than their appearance at a JP Morgan SMid Cap Conference in November. There, the company gave a presentation on the operations, trends, plans and a case study that I mentioned above (San Francisco Case Study), you can go to their website and see for yourself.

However, there is an interesting fact that occurred during the past few months, August 2012 to be specific. Director Stephen M Case acquired a total of 1 million shares of ZIP totaling about $8 million paid for them. This gives us a better perspective of the insider sentiment about the company. It is well known that there can be many reasons for an insider to sell a stock (taxes, diversification, etc.) but only one reason to buy, and that is, to make a profit.

Having said that, isn’t this the time to get in? In my opinion it is. But please consider all the risks involved and the facts I gave you above along with your own research before making a decision.

Note: All valuations were calculated with the closing price of Friday December 14, 2012.

Disclosure: I do not own any of the stocks mentioned above at the time of publication but I will look for a good entry point in ZIP before the year ends. I do not receive any compensation from any of the companies above mentioned.

This article represents my own opinions and conclusions and should not be taken as an invitation to buy, sell or invest in any of the companies. You should do your own research and consider all risks before investing.