Shares of hourly car rental company Zipcar shot up Tuesday after Goldman Sachs suggested buying the company's stock.
THE SPARK: Goldman analysts Steven Kent, Afua Ahwoi and Heath P. Terry lifted their rating to "Buy" from "Neutral" after a meeting with the company's management. They also raised their 12-month price target to $8.75 from $8. The analysts said the share price — down more than 40 percent this year — reflects Wall Street's low expectations for Zipcar because of subpar earnings results. Goldman says management is working to undo some earlier missteps, like a costly radio advertising campaign.
ANALYSIS: While there are other hourly car rental companies, none have the brand recognition of Zipcar. The service "is not being replaced by a new technology or a larger competitor," Goldman says. Zipcar has also expanded outside of its core urban market to college campuses. Wall Street analysts thought it was just a good marketing move but that business now seems to be profitable on its own.
BACKGROUND: Zipcar has stumbled in the past but now that it has its costly infrastructure in place, it appears to be profiting. For instance, during the slow midweek hours, it has been able to attract businesses to use cars that would otherwise be sitting idle. Finally, given consolidation in the rental car business, the Goldman analysts see a higher chance of Zipcar being acquired by another company, although there are no indications that any merger or acquisition is in the works.
SHARE ACTION: Shares of Cambridge, Mass.-based Zipcar rose 64 cents, or 9 percent, to $7.67 in midday trading. Shares hit a two-year low of $6.75 on Aug. 3.