Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 3Q16 Earnings Release
Prev. Ed.: Sep 8, 2016; 2Q16 Earnings Update
Flash Update [Earnings update in progress; to follow]
On November 2, 2016, Avis Budget Group Inc. came out with third-quarter 2016 results, wherein both earnings and sales grew year over year, alongside topping estimates.
Results were mainly backed by strong pricing in the Americas region coupled with the company’s profit-boosting efforts. These also helped Avis to generate its highest quarterly adjusted EBITDA margin to date.
Q3 Highlights
The car rental company’s adjusted earnings came in at $2.47 per share, which surged 25% year over year and came in significantly ahead of the Zacks Consensus Estimate of $2.34. On a GAAP basis, the company’s earnings rose 29% to $2.28 per share.
Further, the company reported record net revenue of $2,656 million in the quarter, which advanced 3.1% year over year and also surpassed the Zacks Consensus Estimate of $2,622 million. The solid top line was mainly driven by a 4% rise in rental days at the International region and a 2% improvement in pricing in the Americas region.
Adjusted EBITDA rose nearly 9% to $469 million, fuelled by enhanced overall rental volumes and better pricing in Americas, somewhat offset by higher per-unit fleet expenses. The adjusted EBITDA margin expanded 100 basis points to 17.7%.
Segment Performance
Americas reported 3% year-over-year revenue growth to $1,821 million, backed by a 2% increase in pricing and rental days each, somewhat offset by a 2% hike in per unit fleet costs. Consequently, adjusted EBITDA jumped 10% to $306 million in the quarter.
The International segment’s revenues advanced 4% year over year to $835 million, thanks to a 4% rise in volumes, partly negated by a 2% drop in pricing and a 2% rise in per-unit fleet costs. Adjusted EBITDA for the segment rose 7% to $179 million on the back of greater rental volumes, reduced marketing costs and favorable currency movements, partly offset by unfavorable pricing.
Financials
Avis ended the quarter with cash and cash equivalents of $985 million, and total corporate debt of $3,866 million. As of Sep 30, 2016, the company’s shareholders’ equity was $474 million. During the first three quarters, the company generated $2,101 million as cash flow from operating activities.
During the quarter, Avis repurchased nearly 3.1 million shares worth $110 million, including which it bought roughly 9.5 million shares for $290 million as of Sep 30, 2016. Management continues to expect to generate free cash flow worth $450–$500 million in 2016, while it now anticipates making share buybacks of $370–$400 million, compared with the previous plan of $300−$400 million.
Other Developments
Avis inked a deal to acquire France Cars, in Sep 2016. A privately-held car-rental company, France Cars makes nearly €60 million in vehicle rental revenues on an annual basis. Notably, the buyout of this France-based company will add roughly 8,000 cars, vans and light trucks to Avis’ existing fleet, thus helping it expand in the French region. The company anticipates this buyout to conclude by the end of this year.
Guidance
Management remains impressed with the company’s third-quarter results and expects the positive pricing in the Americas to continue. However, owing to weaker-than-anticipated demand in the Americas and Europe, the company is on track to right-size its existing fleet. Consequently, management adjusted its 2016 outlook, where it tweaked its overall revenue, adjusted earnings and adjusted EBITDA forecast.
Avis now anticipates 2016 sales to grow 3% to $8.75 billion, including adverse currency impact of around $40 million. Earlier, the company projected revenues for 2016 to grow in a range of 3%–5% to $8.75–$8.9 billion, with a negative currency impact of nearly $50 million.
The company’s Americas segment rental days are now estimated to grow 2% (compared with 2%–3% projected earlier), while pricing is expected to remain flat with no currency impact. Further, the company now expects international revenue to increase 6%, compared with 5%–8% growth guided earlier. The updated International revenue outlook includes a 1% adverse impact from foreign currency, versus 2% projected earlier.
Per-unit fleet costs for the total company are now anticipated to be around $285 million per month, compared to a range of $285−$290 million expected earlier. Per-unit fleet costs in the Americas for 2016 are now estimated to jump 5% to $312 million per month, compared with the previous guidance of a 5%–6% increase to $313–$316 million. For the International segment, per-unit fleet costs are now envisioned to drop 0.9% to $227 million per month, compared with the previous projection of a 1%–3% decline to roughly $223–$227 million. The updated International fleet cost guidance also includes unfavorable currency impact of 1%.
Adjusted EBITDA is now projected to come on the lower end of its previously guided band of $850−$900 million. This still includes a $20 million negative impact from foreign exchange movements.
Interest expense pertaining to corporate debt is expected to be nearly $205 million. The company’s non-vehicle depreciation and amortization costs guidance (excluding the amortization of intangibles related to acquisitions) is pegged at about $195 million. The company’s effective tax rate in 2016 is estimated to be 39%, while diluted shares outstanding are projected to lie in a band of 93–94 million.
Based on the abovementioned expectations, the company expects its adjusted earnings per share to be $2.93, which is close to the lower end of its previously announced range of $2.90–$3.30 expected earlier. Further, earnings are expected to bear the brunt of currency headwinds to an extent of $0.11 a share.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON CAR.
Portfolio Manager Executive Summary [Note: only highlighted material has been changed]
Avis Budget Group Inc. comprises the vehicle-rental operations of Avis Rent-A-Car, Budget Rent-A-Car, and Budget Truck Rental. Avis is the world's second-largest general-use car rental company in the U.S., providing services inCanada, Australia, New Zealand, and the Latin American/Caribbean region.The company has a formidable network of more than 10,000 rental locations in roughly 175 countries that cements its position in the highly competitive vehicle rental industry.
Of thefour firms covering the stock, two provided positive ratings, oneassigned neutral rating and one had a negative stance.
Positive or equivalent outlook (50.0%; 2/4 firms) – The firms with a positive outlook see strong demand for Avis Budget in the U.S. as travel volumes continue to be favorable. Citing strong travel trends for leisure and commercial travelers, and anticipating the sustained expansion of these trends, the firms believe the acquisition of Avis Europe to be one of the major steps taken to enhance the company’s operational foothold in global markets. Other positives, according to the firms, are the company’s cost-cutting initiatives and revenue generating opportunities at Avis Europe.
The bullish firms note that the vehicle rental industry, along with major players like Avis Budget, is benefiting from a pronounced recovery in demand and pricing. The firms also appreciate Avis Budget’s initiatives to restore its European business, and believe that this recovery will help the company when Eurozone fundamentals come into play.
Going forward, the firms expect the company’s shares to move higher, based on factors like sustained productivity growth resulting in better margins and volume growth, along with potential revenue-generating synergies from the Avis Europe and Zipcar acquisitions.
Moreover, the firms note that Avis Budget has outperformed in the current volatile economy and believe it has the potential to maintain its momentum in the near term. The firms presumethe company will continue to drive its bottom-line through its cost-saving initiatives.
Neutral or equivalent outlook (25.0%; 1/4 firms) – These firms remain hopeful about Avis Budget based on its execution of productivity initiatives and benefits from consistent growth in travel trends. Avis Budget is also aggressively pursuing cost saving initiatives, which are expected to boost its bottom-line.Additionally, the firms think that the company’s various buyouts, particularly of Avis Europe and Zipcar, will provide material synergistic opportunities.
Though the firms remain encouraged by the prospects of Avis Europe, enlargement of Budget Europe, ongoing efforts to improve competence and building a strong brand name, theyremain skeptical about the company’s results due to macroeconomic headwinds and industry over-fleeting.In addition, foreign currency headwinds pose another concern for Avis Budget.
September 8, 2016
Overview [Note: only highlighted material has been changed]
Avis Budget Group Inc., based in Parsippany, NJ, operates through a network of over 10,000 car and truck rental locations in the U.S., Canada, Australia, New Zealand, Latin America, the Caribbean, and parts of the Pacific region. The company was founded in 1946 under the name Cendant Corporation; subsequently it changed its name to Avis Budget Group Inc. In 2006. Avis Budget Group Inc. and its subsidiaries engage in vehicle rental operations. It provides car rental services to the commercial and leisure segments of the travel industry under the Avis brand, as well as to the price-conscious car rental segment under the Budget brand; truck rentals and related services to consumers and light commercial users under the Budget truck brand; along with airport car rental services. The company also provides Avis Preferred, a counter bypass program; Avis Where2, a navigation system with real-time traffic alerts; Avis Cool Cars, a line of fun-to-drive vehicles; and Roving Rapid Return program, which permits customers’ returning vehicles to obtain a printed charge record. Further, through the acquisition of Zipcar, the company expanded its offerings from car rental to car sharing services. More information is available on the company’s website Avis Budget’s fiscal year ends on Dec 31.
The firms have identified the following factors for evaluating the investment merits of Avis Budget:
Key positive Arguments / Key Negative Arguments- The company is in a competitive position with a formidable network of more than 10,000 locations.
- The acquisition of Avis Europe provides revenue-generating opportunities.
- The company’s cost-saving initiatives are likely to improve its results in the future.
- Avis Budget has a sound balance sheet and stable cash flow.
- The company has no funding risk due to its secure access to debt.
- The acquisition of Zipcar has broadened Avis Budget’s offerings from car rental to car sharing, thereby enabling it to compete better with peers like United Rentals and Hertz Global, which have their own car sharing services.
- The high level of competition in the vehicle rental industry can affect Avis Budget’s pricing and rental volume.
- Avis Budget is highly dependent on third-party distribution channels.
- A major disruption in communication or centralized information networks could adversely affect Avis Budget’s performance.
- Fleet financing may be difficult to secure, and expensive when obtained.
- Housing activity business may hamper truck rentals.
- A stronger dollar could hurt inbound retail travel to the U.S., which will hurt the entire car rental industry.
Avis Budget reports its operating results under two segments:
Americas: This segment comprises all company operations in North America, South America and the Caribbean, including operations at Budget Truck Rental.
International: This segment consists of all company operations outside the Americas.
September 8, 2016
Long-Term Growth [Note: only highlighted material has been changed]
The firms note that AvisBudget’s car rental volumes have been growing, supported by a resurgent business and leisure travel environment. Looking ahead, the firms expect volumes to continue growing, driven by continual travel demand and modest economic growth. Going forward, the firms consider that the company’s fundamental drivers, such as sustained productivity growth resulting in better margins, volume growth, and potential revenuegenerating synergies from the Avis Europe acquisition will be promising.
Further, following the completion of the Zipcar acquisition, Avis Budget has been aggressively expanding Zipcar’s services at various new locations. The firms are of the opinion that this acquisition has broadened Avis Budget’s scope of offerings from car rental to car sharing, thereby enabling it to compete better with rivals such as United Rentals and Hertz Global, which have their own car sharing service.
Avis Budget has always been innovative and was the first in the vehicle rental industry to adapt to the recent tech era, wherein companies are exploring the online and mobile portals to enhance sales and margins. The company’s latest achievement in this area was the introduction of MasterPass and Amex Express payment options, and that of the “Avis Now” feature that is likely to enhance consumer service and enrich their car-renting experience with the company.Avis Budget’s earlier achievements in this field include the application of Apple Watches; launch of an Android application that enables customers to make, confirm or cancel bookings through voice commands; launch of BudgetTruck.com, Budget Brand’s revamped website for truck rental customers; along with its mobile app and adoption of the Google Wallet app all in order to enhance customer experience. Looking ahead, the company plans to make further investments in technological advancements.
Furthermore, from the series of recent events, it seems that Avis Budget is aggressively looking for opportunities to increase its company-operated locations in the fast growing markets by acquiring Budget Car Rental licensees.
The company remains focused on expanding its Budget brand, taking its multi-brand strategy to the next level. In line with this strategy, the company is in the process of acquiring its Budget Car Rental licensees at various locations. Some of the recent acts of buying licensees include the 100% acquisition of its Brazilian licensee; acquiring licensee for southern Africa from Barloworld; along with owning the Budget licensee for Southern California and Las Vegas in the U.S.; Norway, Sweden and Denmark in Scandinavia; and Edmonton in Alberta, Canada. These moves will help Avis Budget to enhance the Budget brand loyalty through better utilization of the licensee’s established presence, ultimately aiding its top line.
Avis Budget’s expansion strategy has been in full swing via alliances, acquisitions and joint ventures. Moreover, in an effort to enhance its global footprint, the company is investing in other growing markets where car rental demand is on the rise. Some of its recent ventures include its marketing deal with Universal Parks & Resorts, per which Avis will be the latter’s "Official Car Rental Partner”; its multi-year preferred partnership deal with JetBlue Airways and Southwest Airlines; becoming the Official Rental Partner of Pebble Beach Resorts; plans to extend Zipcar’s floating car service to Brussels; expansion of Zipcar to Wilmington and Ottawa; strengthening its Asian footprint; and the acquisition of Italy-based Maggiore.
The company also remains focused in fortifying its fleet with the addition of latest car models from leading manufactures, to attract customers.
September 8, 2016
Target Price/Valuation [Note: only highlighted material has been changed]
Rating DistributionPositive / 50.0%
Neutral / 25.0%
Negative / 25.0%
Avg. Target Price / $36.40
Highest Target Price / $46.00
Lowest Target Price / $20.00
Firms with Target Price/Total / 4/4
Risks to the target price include: 1) rising vehicle and interest costs, which combined with inadequate price increases, are keeping margins in the Auto Rental segment under pressure; 2) poor performance, particularly in the truck rental segment, given rising fleet costs and a pullback in demand; and 3) slower-than-expected implementation.
Recent Events [Note: only highlighted material has been changed]
On Aug 2, 2016, Avis Budget’s 2Q16 adjusted earnings came in at $0.63 per share, which plunged 25% year over year and lagged the Zacks Consensus Estimate of $0.84. However, net revenue advanced 3% to $2,243 million and surpassed the Zacks Consensus Estimate of $2,212.3 million.
On Jul 19, 2016, Avis Budget introduced a digital payment option with MasterPass. As a result, its customers can now make a fast and secure online payment while making reservations on Avis.com or Budget.com. A simple and trusted digital platform, MasterPass, has been launched by MasterCard to ease online payments and improve shopping experience.
On Jul 12, 2016, Avis Budget's Avis Car Rental unit announced a transformation in its overall car-renting process yesterday, with the launch of the “Avis Now” feature for its mobile app.The “Avis Now” feature has been designed with customers’ inputs, as the key motive behind this solid innovation was to enhance consumer service and enrich their car-renting experience with the company. This feature is currently available in over 50 U.S. locations, while the company is on track to extend its reach to various global markets. (Further details discussed in the relevant section below).
On May 31, 2016, Zipcar, the car-sharing division of Avis Budget Group Inc., announced plans to launch a floating car-sharing service in Brussels, marking the expansion of the brand’s international footprint in Europe. This service, which will go live in Brussels from Sep 14, will be the brand’s most flexible car-sharing service till date.This service will provide members the ease of picking up and dropping off a Zipcar at anywhere in the city, providing a convenient and cost-effective way to get around the city.