Car Sharing Industry Boston University Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge. Zipcar, Inc. Date: Dec. 12, 2011 Ticker: ZIP (NASDAQ) Recommendation: BUY Price: $14.28 (As of 12/09/11) Price Target: $19.45 Earnings/Share (Normalized to 42.48mm weighted average diluted shares outstanding) Mar. Jun. Sept. Dec. Year P/E Ratio 2008A $(0.17) $(0.08) $(0.04) $(0.05) $(0.34) NA 2009A (0.07) (0.04) (0.03) 0.03 (0.11) NA 2010A (0.13) (0.12) (0.06) (0.02) (0.33) NA 2011E (0.14) (0.13) 0.02 0.00 (0.26) NM Source: CapitalIQ, Student Research GREEN LIGHT TO BUY ZIPCAR We initiate coverage of Zipcar with a one-year price target of $19.45, offering a 36% upside in comparison to a ten-year standard deviation of returns of the Small Cap S&P600 Index of 20%. ZIP will maintain its position as the world’s leader in car sharing through aggressive expansion into markets like Europe, growing membership at a projected CAGR of 17% through 2016. Zipcar’s value proposition will drive membership growth, which will in turn drive revenues. Zipcar use is about 69% less expensive than owning a car, which is a strong incentive for new members to join, especially when coupled with increasing costs of living. We estimate Zipcar’s total revenue growth at 21% CAGR from 2011 through 2016, as a result of new members and increased vehicle utilization. Increased utilization and growing fee revenues will drive margin expansion which will boost earnings. Margin expansion will be driven by higher growth in fee revenue, which we expect to reach 15% of total revenue by 2016, up from 14% in 2011. We forecast EBITDA margin to be 16% by 2016, in comparison to 11% in 2011. Zipcar’s strong solvency position provides room for additional expansion. With the latest debt-to-equity ratio of 35%, Zipcar has an estimated 3.7% after-tax cost of debt. The Company’s asset-backed security notes allow for lower rate borrowings, which can be utilized for vehicle purchases. Zipcar has shown its ability to obtain additional term loans of up to $40 million to finance acquisitions. ZIP is an emerging story which makes it hard for investors to evaluate early in its business life cycle, similar to a venture capital company. We believe this leads to a misunderstanding of the Company’s potential and the low market valuation; however when all variables are well considered, we are confident that ZIP is a BUY. ZIP vs. S&P 600 Market Profile (Apr. 2011 - Dec. 2011) 52-Week Price Range $31.50/$13.87 Average Daily Volume (USD mm) 0.36 0% Beta 1.17 Shares out (USD mm) 39.3 Market Cap (USD mm) 561.2 Institutional Holdings (USD mm) 233.1 -50% Insider Holdings (USD mm) 19.0 Apr-11 Jul-11 Oct-11 Total Debt to Equity 0.35 Return on Assets (LTM, 3Q11) 0.3% ZIP S&P 600 Return on Equity (LTM, 3Q11) -7.8% Source: CapitalIQ Source: CapitalIQ CFA Institute Research Challenge December 12, 2011 Car Ownership vs. Zipcar Costs USINESS ESCRIPTION Per Year B D Zipcar has grown revenues and membership rapidly but has so far made slow progress towards $6,000 profitability. $5,000 $4,000 Zipcar, founded in 2000 and based in Cambridge, Massachusetts, operates the world’s leading car sharing $3,000 network. Zipcar went public in April of 2011 and has 72% of the car-sharing market share, which is only a small decrease from its 75% market share in 2005 due to its continued domination of the industry. The $2,000 Cost in USD in Cost Company has achieved five-year CAGR of 48% in organic membership growth and the acquisitions of $1,000 Flexcar and Streetcar in 2007 and 2011, added an additional 11% to membership to each year. $- Car Ownership Zipcar A key strength of the firm is the technology utilized in its operations. Private Ownership $4,733 $- Vehicles are reserved by phone, the internet, or through smart-phone applications and are unlocked with a Zipcar $- $455 keyless entry card (Zipcard), using RFID technology. Fleet operations are supported by software that collects Public Transit $720 $720 real-time data on Zipsters and allows the Company to monitor vehicle usage and profitability. Taxi $192 $384 Conventional Rental $- $200 As of 3Q 2011 the Company had operations in the United States, Canada, and the United Kingdom, and Figure 1: Zipsters spend an average $1,800 a year on transportation costs, about 650,000 members, 9,500 cars, 600employees, and a presence in over 130 cities including 15 major versus $5,500 per year for car owners. metropolitan areas. Despite its revenue growing at a CAGR of 67% from 2005 to 2010, Zipcar is making Sources: Victoria Transport Institute, US slow progress to profitability; net income margin of 1% was declared for the third quarter of 2011, but Dept of Transportation, Office of Fair Trading, TaxiFareFinder.com guidance for 4Q2011 is for a net loss. Services: ZIP provides an attractive value proposition for both individual and business Monthly Loss Per Vehicle customers, which should encourage new members to join. $2,500 SG&A Revenue: $1,888 Fleet Rental: ZIP provides self-service vehicles in convenient locations for an annual fee of $60 $2,000 R&D plus an hourly rate of between $7.75 and $13.50 or a monthly fee of $50 and a 10% discount on driving rates. Gas, insurance, and up to 180 free miles per day are included in the price. This results $1,500 Membership in savings of about 69% versus owning a car, despite decreased convenience (see Figure 1 and Services $1,000 Depreciation Exhibit 1 in Appendix). $500 Parking FastFleet: “FastFleet” is a proprietary vehicle-on-demand software that ZIP leases to organizations $- Insurance that manage their own fleet of vehicles, at a rate of $65 to $95 per car. This allows organizations to track vehicles, analyze usage and diagnostic data, and improve efficiency, saving as much as Gas $(500) $1,250 a month per vehicle. Loss: 18.1% Maintenance $(1,000) Cost Drivers: ZIP’s can distribute high fixed costs across its 650,000 members, and will increase Figure 2: Zipcar currently experiences utilization to improve profitability. an 11.5% loss on each vehicle without accounting for fee revenues, a loss they need to address through increased ZIP achieves economies of scale through distribution of fixed cost such as gas, parking, and car purchases, utilization. over its fleet (see Figure 2 and Exhibit 2 in Appendix). ZIP passes on gas price increases to customers, which keeps its own costs down, while still offering a cheaper alternative to customers owning vehicles. Usage Revenue Per Vehicle Per Day Increasing utilization per vehicle will lead to higher revenues per vehicle, which will mean higher $100 profitability as ZIP covers its fixed costs. $90 $80 Revenue per vehicle per day is currently $65, which translates to utilization of 6.5 hours; both have $70 been increasing historically. $60 We believe this trend will continue as ZIP expands its corporate customer base, bringing more $50 $40 weekday utilization (see Figure 3). $30 Additionally, we believe that management is capable of achieving their stated target utilization rate $20 y = 0.013x - 503 of 9 hours, based on their record with past goals (see discussion of Management on page 4). $10 R² = 0.722 $0 Sep-09 Apr-11 Dec-12 Aug-14 Mar-16 CUSTOMERS Actual Predicted Zipcar’s plan for increasing utilization includes a new focus on business and governments. Figure 3: Historical revenue per vehicle per day has been increasing. Individuals: Zipcar has traditionally targeted middle-class customers between the ages of 20 and Assuming a constant hourly rate of 35, who do not own cars and live in densely populated cities. These customers usually utilize $10, this means each car is being Zipcar for weekend trips for social gatherings and shopping. used for more hours daily. Universities: Zipcar operates in over 150 college campuses, offering car sharing to those between the ages of 21 and 25 without the additional charges required by traditional car rental firms. As of September 2011, universities make up 10% of the total revenue base. 2 CFA Institute Research Challenge December 12, 2011 Market Segments Governments and Businesses: The Company partners with governments and corporations to (2011) provide cars and fleet management services (FlastFleet). “Z2B” offerings have grown by 40% as a Universities Govts/Businesses share of revenues since 2005, with 10,000 small and medium sized businesses signed up as of July Individuals 2011. ZIP also offers reduced membership fees and weekday driving rates to companies and governments who use ZIP’s fleet, providing a steadier source of income, since they use cars during 10% weekday hours when individual customers are not using them (see Figure 4). Geographic Presence: ZIP sees increased profitability in established markets, but credible threat from 55% 35% incumbents as it enters new markets. Zipcar targets cities with a large population between 20 and 40 years old, with median household incomes between $34,000 and $72,000. Population density is a key factor for the “established markets,” with an average of 10,590 people per square mile (see Exhibit 3 & 4 in Append ix for Statistics on Zipcar cities). Figure 4: Zipcar has a diversified Cities: The “Established”1 Zipcar cities are New York, San Francisco, Boston, and Washington customer base and has been shifting its focus to businesses.