Cramer uncovers what’s really destroying value for car rental stocks

Jim Cramer won't officially say the car rental industry is dead, but it is clearly broken.

This was very apparent in stock action for both Hertz Global and Avis Budget, two large publicly traded car rental plays that have been hammered in the past few years.

"These stocks are not bargains, and I would stay the heck away from both of them until we can get some real clarity on what is actually ailing this business, and what could potentially fix it," the "Mad Money" host said.

After the Great Recession, both Hertz and Avis had strong performance as the car rental industry benefited from a rebounding economy and a wave of consolidation. Since then, things have become more difficult.

Rental car companies Hertz and Avis at Lynden Pindling International Airport on June 15, 2012 in Nassau, The Bahamas.
EyesWideOpen | Getty Images
Rental car companies Hertz and Avis at Lynden Pindling International Airport on June 15, 2012 in Nassau, The Bahamas.

In 2014 Hertz uncovered some company-specific issues, including accounting issues that took ages to sort out. And while Cramer believes there was poor management, it was clear that that was not the entire reason for the struggles.

Hertz began reporting solid earnings again in August 2015, but then things got worse in 2016. Going into last year, analysts were worried about sluggish demand from commercial customers, resulting in weak pricing. Sure enough when the company reported in May, it massively missed Wall Street's earnings estimates.

In its most recent quarter in November, things were not better. Hertz delivered yet another gigantic earnings miss. Since that time, Hertz's stock has continued to get crushed, and its CEO and chief revenue officer have both announced they are leaving.

Hertz reports again next Monday, and Cramer is concerned.

"Avis delivered a real ugly quarter last week, and it is hard to imagine Hertz doing well if Avis is doing badly," he said.

Avis is less of a disaster than Hertz, but nevertheless still brutal. It has had no accounting issues and fewer execution-related problems, but still faced the same industry-related difficulties in recent years. Avis has been hurt by weak demand and generally soft pricing, though it did manage to deliver a decent quarter in November.

Looking at the overall climate of the industry, it was clear to Cramer that both Hertz and Avis have been hurt by weak demand, coupled with rising costs. Things just seem to be getting worse, and Cramer said it is time to accept that the industry has some serious long-term challenges.

"At the end of the day, rental cars are a commodity. People are just going to go with what is cheapest, which, again, is a bad place to be," Cramer said.

And with Uber and Lyft taking major market share, the only thing that Cramer thinks could boost the stocks is if there was a huge uptick in worldwide travel.

Correction: This article was updated to reflect the resignation of the chief revenue officer.

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