Zipcar (NYSE:ZIP), the car-sharing company that had a successful IPO in April 2011, has yet to post any profits. The company nonetheless has been showing improved profit margins and should reach profitability in the near future. We recently launched coverage of Zipcar in our note titled New Coverage Zipcar – $27: A Maturing Business Model That Holds Promise. The company competes with traditional car-rental companies like Hertz Global Holdings (NYSE:HTZ), Avis Budget Group (NYSE:CAR) and car sharing services like Connect by Hertz, Enterprise’s WeCar, UHaul’s UCarShare and City Car Share.
We have a price estimate of $27 for Zipcar, which is around 25% ahead of the market price. Below we take a quick look at three factors driving its margin improvement.
Improvement in fleet operation costs
Car sharing is a capital intensive business and it takes time before the investments start returning profits. Zipcar’s fleet costs currently stand at almost 70% of total revenues and includes vehicle lease costs. While Zipcar plans to continue with leasing vehicles in Canada and the U.K, it is now replacing its U.S. fleet with purchased and owned vehicles under the ABS (Asset-Backed Security) facility that provides it access to cheaper vehicle financing. The number of vehicles under operating leases fell from 90% in 2009 to 50% in 2011. This shift is expected to continue and will result in lower vehicle lease expense costs which will thus improve EBITDA margins.
Change of revenue mix
Zipcar currently generates 12% of its revenues from membership fees and 88% from usage revenue. Fee revenue is a highly profitable source of income for the firm that has high gross margins at over 90%. In the coming years, Zipcar expects fee revenues to contribute over 17% of total revenues. This is expected to lead to an improvement in the overall EBITDA margins for the firm.
Better yield management
Better equipped with technology and demand-utilization data, Zipcar is also likely to achieve better yield management going forward.
While Zipcar’s top-line is currently growing at approximately 30%, its usage revenue per vehicle per day (which is a key performance metric) has significantly improved from $48 in 2009 to $60 in 2010 and most recently touched $65 in June 2011. This indicates that management’s is utilizing its fleet more effectively. We expect Zipcar to turn profitable as its markets mature and penetration levels increase.