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May 8, 2012

Stock of the Day

Recommendation: Strong Sell

Welcome to the Stock of the Day for May 8, 2012. Just a little over a year ago, Zipcar Inc. (ZIP) launched its initial public offering. Within one trading day, the stock zoomed ahead by 66%, grabbing market headlines. This stock created quite a buzz a year ago, but now that the company has four quarters of earnings data under its belt, let's revisit this stock and see if it is still generating investor interest.

Company Overview: As the largest care sharing business in the U.S., Zipcar Inc.'s motto is appropriate: "Wheels when you want them." The business operates as a members-only service where members an reserve Zipcars anytime during the day; members have a "Zipcard" which allows the member to unlock the door. Founded in 2000, the service has gained traction with generation X-ers and Y-ers living in cities. The company employs just under 500, but has services across 14 major metropolitan markets in the U.S., Canada as well as the United Kingdom.

Earnings Buzz: On April 25, Zipcar Inc. announced first-quarter earnings and it wasn't pretty; the company continued its track record of posting a loss for every quarter since it went public. The company did manage to narrow its loss to $3 million, or -$0.08 per share, but its $59.1 million in sales missed the consensus estimate of $59.3 million. What happened last quarter was that even though the company grew its customer base by 23%, Zipcar faced mounting expenses related to business expansion. Due to these poor operating results, shares of ZIP slid immediately following the announcement. Since then, the stock has continued to gap down; it has lost over 25% since April 25.

Expansion Strategy: As mentioned earlier, the company's first-quarter earnings were hit by costs related to Zipcar's expansion strategy. In early February, Zipcar Inc. became the lead investor in a $13.7 million round of funding for Wheelz Inc., a peer-to-peer car sharing company based in Palo Alto, California. As such, Zipcar Chairman and CEO Scott Griffith now sits on Wheelz' board of directors. Earlier in February, the company became the majority shareholder in Spain's Avancar Carsharing, which is the largest car sharing service in the company. Zipcar now has a controlling stake of more than 60% in the company.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system.  Because ZIP has been publicly traded for over a year, it is now eligible for the Portfolio Grader tool. Unfortunately, in the past year the company just hasn't been able to drum up investor interest over the long term; buying pressure for this stock has hit rock bottom. The company also has plenty of room for improvement in terms of its fundamentals. Right now, Zipcar does well in terms of sales growth and earnings momentum. However, the company is quite weak in terms of cash flow and return on equity; analysts have noticed this, so they're not overly optimistic with their earnings estimates. This company receives an F for its Quantitative Grade and a C for its fundamental grade.

Bottom Line: If you added shares of this stock in the past year, I strongly suggest you find a good time to part ways with them.

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