Mad Money

Avis ‘darn cheap’, says Cramer, despite rally

Avis racing down the fast-line
Avis racing down the fast-line

(Click for video linked to a searchable transcript of this Mad Money segment)

Year to date shares of Avis have rallied about 35%, yet Jim Cramer thinks the stock remains relatively cheap.

"I think is still worth buying even after its epic run this year," Cramer said.

Here's why:

"First of all, the rental car industry as a whole is basically a cartel," Cramer explained. That is, a lion's share of the business, 96% of airport based car rentals, are controlled by only three companies, the privately held Enterprise, along with Hertz and Avis.

And Cramer says the car companies are only now taking advantage of the competitive position.

"Any industry where there are only three players of real significance is eventually going to see substantially higher prices," Cramer said. The privately held Enterprise has begun to raise prices in a meaningful way, and I bet the rest of the industry follows."

Also, Cramer says Priceline has been quite vocal about not getting enough inventory from rental car firms. Cramer takes the development as a sign that demand is increasing organically, therefore rental car companies don't need to rely on Priceline, as much, to help rent out cars.

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Although both of the preceding catalysts are powerful, they're industry-wide catalysts that should drive business broadly.

Yet when compared to Hertz, rival Avis has been on fire. Shares of Hertz are relatively flat year to date, while Avis has gained sharply.

That suggests to Cramer that there are specific catalysts driving buyers to Avis.

Digging deep into company's metrics and businesses, Cramer has found these stock specific catalysts.

- Avis is expanding into higher margin businesses.
- Residual resale values on cars have improved substantially.
- The company's acquisition of Zipcar is paying off.
- Avis is growing rapidly in Europe.
- Avis has an opportunity to refinance some debt at dramatically lower rates

On top of all that, "Avis trades at 15 times next year's earnings estimates, which is basically in line with the average stock in the S&P, however it sports a 25% long-term growth rate, which is much higher than the average stock," Cramer said.

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All told, even though shares are already up 35% year to date, Cramer believes the path of least resistance remains higher. "That's right, I think Avis is still darned cheap even after its momentous rally."

Call Cramer: 1-800-743-CNBC

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