A business that benefits from an oligopoly, where a few companies control an entire industry, could serve as a great investment opportunity, Jim Cramer said Tuesday.
"There's very little competition, and that allows the players involved to mercilessly increase prices," Cramer said on CNBC's "Mad Money." "That's great if you're a shareholder, although it's totally horrible if you're a consumer."
Take the rental car business, for example, which is driven by Avis and Hertz, as well as privately-held Enterprise. Over the last decade, the industry consolidated into just three players. In 2006, Avis bought Budget. The next year, Enterprise bought Alamo and National. Last year, Avis acquired Zipcar.
Hertz bought Advantage out of bankruptcy in 2009, although it's now being forced to sell Advantage to a group of investors in order to ease concerns about its latest acquisition, the Dollar Thrifty deal that just closed in November. Prior to the deal, Hertz, Avis and Enterprise controlled 87 percent of the rental car market by revenue. After the Hertz-Dollar Thrifty deal, however, these three companies now control 94 percent of the market.
"This industry is tied to economic activity and capacity, and both of them are going in the right direction for the likes of Hertz and Avis, with a stronger economy boosting demand and reduced capacity that allows them to boost prices, aided by an East Coast shortage of rental cars courtesy of superstorm Sandy," Cramer said. "With 94 percent of the industry in the pocket of the top three players, they no longer have to worry so much about price wars from smaller operators who tried to gain market share by undercutting the big boys."
To play it, Cramer prefers Hertz over Avis thanks to its Dollar Thrifty acquisition. The company thinks the deal could generate $300 million of revenue synergies from 2013 through 2015. Hertz has also been able to shrug off major selling pressure, Cramer said, noting the company has recently announced big secondaries and yet its stock has roared. Finally, its stock trades at a discount to Avis, being as Hertz currently sells for 11.1 times 2013 earnings estimates while Avis sells for 11.8 times earnings.
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