Sixt AG: Best In Class – But Don’t Buy The Common Stock

A few years ago, I shared a rather bullish take on Sixt AG (OTCPK:SIXGF). Back then, I was especially bullish with regard to Sixt’s potential as a leader in car sharing. As it turned out, that did not really come to pass. Nonetheless, I still have a positive view of the company. In this article, I will explain why I believe Sixt to be the most attractive listed car rental company. I will also discuss why I do not think that the common stock is the best way to invest.

Best In Class Car Rental

While Sixt trades at a higher valuation for the car rental sector, I believe this to be justified by the higher quality of the underlying business. Sixt’s fleet has a relatively high share of premium vehicles (57 percent as of September 30^th), in particular by Mercedes-Benz Group AG (OTCPK:MBGAF;OTCPK:MBGYY), BMW AG (OTCPK:BAMXF;OTCPK:BMWYY;OTCPK:BYMOF), or Volkswagen AG’s (OTCPK:VLKAF;OTCPK:VWAGY;OTCPK:VWAPY) Audi. That, together with a high presence at airports and important train stations, affords it a certain pricing power in my view. Naturally, that is advantageous in terms of profitability.

Its balance sheet is strong, too. As of September 30^th, Sixt had around €5 billion in total liabilities. At the same time, the company reported miniscule cash and equivalents of only about €11.8 million. One has to keep in mind, however, that there are also €4.7 billion worth of rental cars on its books. For comparison: The largest competitor, Avis Budget Group (CAR), reported debt of $23.7 billion with $21.2 billion in rental vehicles and $555 million of cash and equivalents on the balance sheet as of December 31st. It also has negative equity of a little more than $300 million, compared to Sixt’s positive €2 billion. The company’s financial health is underlined by its ability to refinance at favorable terms. In January, Sixt placed a 5-year bond with a relatively modest coupon of 3.75 percent.

After record profit in FY2022, 2023 and possibly 2024 will have lower profits due to growth investments. For example, Sixt recently announced a big deal with Stellantis N.V. (STLA) for around a quarter million vehicles of various classes. In the long run, higher revenue should, by my expectations, make an EPS of around €8 possible from 2026 onwards (provided there is no major economic downturn).

Opportunistic Expansion And Cost Cutting Options

Sixt used the pandemic years well by scooping up smaller, struggling competitors on the cheap in order to obtain airport licenses across America. That way, it got a foot in the door for further expansion in one of the most important rental car markets globally. Ultimately, the plan is to have about 10 percent market share at the top 50 airports in the US by 2027.

This shrewd move, in my opinion, underlines the advantage of the kind of long term thinking that comes with family control. Sixt also leverages its strong brand through franchise operations in smaller and or riskier market without putting too much capital at risk. That way it has a presence in more than 100 countries globally.

On the other hand, Sixt is also able to reduce costs relatively quickly if need be. The company tends to negotiate favorable leasing terms with carmakers, which affords it some flexibility with regard to fleet reductions on short notice. More than half of the fleet costs are variable and could be cut within about six months. In fact, Sixt reports fixed costs of only 26 percent overall.

Beyond Classic Rental

Back in summer of 2019, I considered Sixt a potential big winner in car sharing. That has, I must admit, not materialized. The company’s bread and butter is still the classic rental business. That notwithstanding, there are some adjacent fields which the company bundles through its “ONE” platform. These include ride hailing, car subscriptions and even bike sharing. While these are far less important in terms of revenue generation than the classic rental business, the availability of such services may increase the attractiveness of Sixt as a provider of mobility, which also strengthens the core segment.

Dividend

One of Sixt’s core differentiators is its generous (albeit not always stable) dividend policy. In this regard, once more family control is advantageous. As the family members employed by the company receive only relatively modest salaries, their main source of income from the family business is the dividend. In so far, there is alignment with non-family shareholder interests.

While the dividend is somewhat volatile and is regularly cut/cancelled in weaker years, Sixt tends to have a relatively high payout ratio averaging roughly around 50 percent in recent years (admittedly with a considerable spread). For FY2022, the company paid a dividend of €4.11 per common share (in addition, there was a €2 special dividend). Under the assumption that EPS will be lower in 2023 given relatively high investments, I could imagine that the dividend will be reduced to somewhere around €2.5 to €3.5 per common share. That would equate to roughly between 2.9 and 4 percent dividend yield. Under the assumption of 2024 EPS of around €8 and a payout ratio in the vicinity of 50 percent, the dividend yield based on the current share price could rise to comfortably above 4 percent in the medium term.

Preferred Shares Are The Better Investments

If you liked what you read so far, allow me to present what I believe to be the preferable alternative to an investment in the common stock. There is a second share class, preferred shares (“Vorzugsaktien”; listed for example at Xetra under the ticker symbol SIX3). The way these work under German corporate law is that – unlike common stock – they come without any voting rights. In return, holders of those stocks always receive a dividend distribution (which admittedly may also be a merely symbolic amount), otherwise they gain a voting right. Additionally, the dividend per share is usually a few cents higher (FY2022: €4.13; plus €2 special dividend) compared to common stock.

And now to the best part: the preferred shares are significantly cheaper. At the time of writing, preferred shares trade at €61, compared to €85.5 for the common stock. Usually, the voting rights should have a value of their own, thus justifying a certain premium. However, in the case of Sixt, Erich Sixt controls 58.3 percent of voting rights. As long as the family does not consider giving up control, I see little point in having a voting right, let alone at a premium of 40 percent. And, frankly, I see no indication of that being the case for the foreseeable future. Quite the opposite, indeed. While I arguably turned out to be somewhat wrong about car sharing, another prediction of mine was spot on: brothers Konstantin and Alexander Sixt succeeded their father, Erich, as Co-CEOs. To me, this looks very much like the next generations taking over in order to “keep it in the family”.

I suppose that part of the reason for the steep price difference is the fact that, unlike common stock, the preferred shares are not included in relevant indices, thus not bought by ETFs. That aside, I would argue that the preference share is the better way to invest in sixt.

Risk Factors

As with any investment, there are risks to be considered. For one, the rental car business by its very nature requires a lot of capital. That exposes the company to an inherent interest rate risk. Also, declining used car prices potentially have a negative impact in this regard. With EVs in particular, there may be heightened risk. Notably, Sixt has decided to no longer buy vehicles from Tesla, Inc. (TSLA), after price cuts send used vehicles’ market value tumble. And, of course, we are dealing with an inherently cyclical business here. These are the business specific risks. They more or less apply to any car rental company.

There are, however, some risk factors specific to Sixt. One thing I would like to highlight is the company’s marketing strategy. In German speaking markets, Sixt is somewhat (in)famous for its satirical ad campaigns that refer to all manners of societal, political or pop-cultural issues in a humorous fashion. The company provides an online archive of previous campaigns (though I suppose that for non-German speaking persons they are not too appealing). These kinds of ads are not always, strictly speaking, politically correct. Personally, more often than not, I tend to find these ads rather amusing. But in today’s day and age, one might always find some person or group that feels offended. There is a (small) possibility of such indignation leading to boycotts or similarly damaging impacts on Sixt’s revenue. At 29 percent (first nine months of 2023), Germany is still a very important market in terms of revenue. Notably, Sixt is not running a similar ad campaign in the US (where consumers, on average, are more sensitive in this regard in my opinion).

Lastly, there are also possible downsides to family control, despite its aforementioned benefits. In particular, a situation may arise in which Erich Sixt, as the controlling shareholder, may interfere with his sons’ leadership of the company. A patriarch who struggles to let go is usually not good news for a business. To be clear, I do not see any indication that this is the case at Sixt at this point. Nonetheless, it would not be an uncommon occurrence and should thus be considered. Co-CEOs who (presumably, I am not privy to Erich Sixt’s estate planning) will inherit equal shares also means, that in the long run the brothers will need to continue to harmonize with one another, lest it may somewhat paralyze the business.

Conclusion

All in all, I believe that Sixt is the most attractive listed car rental company. The company has a track record of generous, if not always stable, distributions to shareholders. Being a family run business, I believe there is an emphasis on long term value creation. So far, the leadership transition to the next generation appears to work out just fine, too. Going forward, profits are likely to improve to a level not far off record levels. In short, there is much to like about the company. However, the preferred shares are arguably the better investment on account of their materially cheaper price and minimally higher dividend. I am, therefore, rating the common stock a hold.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.