• Avis Budget Group’s financials show a high level of debt and lack of growth catalysts, leading to a low valuation multiple.
• Solvency metrics indicate the company is overleveraged, and efficiency and profitability have started to decline.
• Analysts expect a drop in earnings for Q4, and the company’s lackluster revenue growth and debt pile are concerning for investors.

Investment Thesis

Avis Budget Group (NASDAQ:CAR) is going to report its Q4 results on February 12th after the bell, so I wanted to take a look at the company’s financials and see why the company is trading at such a low multiple. The balance sheet is not great with lots of debt, and the lack of growth catalysts is keeping investors at bay, I am giving the company a hold rating and would like to see margins and top-line growth improving. The company is trading above my intrinsic value calculations.

Financials

As of Q3 ´23, the company had around $572m in cash and equivalents, against $4.7B in long-term debt, not including around $15B related to Avis Budget Rental Car Funding LLC, which is a special purpose entity [SPE] created specifically for vehicle financing. There may be a lot of people who will stay away from companies that use so much leverage, but I like to look at a couple of solvency metrics that show me whether the company is overleveraged. Also, I will be using the whole debt, including the SPE’s large debt outstanding to be more conservative.

Firstly, the debt-to-assets ratio stood at around .72, which is just slightly over my max of 0.60, so it can be better but it shows that, in terms of assets, the company doesn’t seem to be overindulging on debt. Secondly, I like to look at the company’s ability to pay off its annual debt obligation in the form of annual interest expense on debt. Here, the company is pushing it a little as well, because it doesn’t pass my more stringent requirements. Many analysts look for at least a 2x interest coverage ratio, however, I prefer to see at least a 5x because it allows for much more leeway for bad years of performance, and a 5x is much safer than a 2x. As of Q3, the company’s coverage ratio stood at around 3x, so analysts would still consider the company healthy, however, I’m going to be more conservative in my valuation section of the company.

The company’s current ratio has been on a downtrend over the last few years, which is not ideal as it is now under 1, however, is this a cause for concern? It could be, but many companies operate with lower current assets against current liabilities. In the long run, I would like to see the company getting back up over 1, but for now, I will be even more conservative in my valuation estimates in the later section. As of Q3, the current ratio stood at around 0.8.

In terms of efficiency and profitability, the company’s margins have seen quite a bit of improvement in the last 5 years, however, we can also see these peaked around Q3 ´22 and started to curve downward, indicating inefficiencies in operations are starting to appear. 2023 was not an easy year for many companies due to high interest rates and inflation and an overall uncertain environment, so, understandably, efficiency dipped, but it is too early to tell if it will continue to go down or will it stabilize over the next couple of quarters.

Continuing with efficiency, the company’s ROA has experienced a similar peak unsurprisingly, however, the company’s ROE has been negative for a few years now, so that will have to be taken into account also when I do the company’s valuation. In the latest quarter shareholder equity has improved to $-28m, so I would expect a lot of fluctuations in this metric going forward especially if it crosses into the positive territory.

In terms of revenues, I would say the company had decent growth over the last decade, which also accelerated since the bottom of the pandemic lows. For the upcoming full year, the analysts are estimating little to no growth for the next three years, which is very disappointing. The company was doing so well in the last three years and now the revenue growth is stagnating. The management is not giving guidance on what revenue the company will do, which doesn’t help the company’s case at all.

Overall, the company has improved quite a bit since the bottom of the pandemic scare, however, it seems that in terms of revenues, it is plateauing. In terms of the company’s balance sheet, there is very little to like there in my opinion, and many investors would see the same. A lot of debt, which is manageable for now, however, if the company sees a decent drop in performance, there is very little wiggle room and it could be in some solvency troubles.

What to Expect from Q4

Analysts are expecting quite a drop in earnings y/y and sequentially of around $2.81B in revenue. As I mentioned the management isn’t providing guidance, so I will have to stick to these estimates and see how they differ from the actual ones.

Over the last 12 quarters, the company beat EPS estimates 100% of the time while beating revenues 83% of the time, with the last two being small misses. I think the company has a good chance of beating estimates this time around also. The very low EPS seems to be due to seasonality, however, it is still very low compared to the other recent Q4s.

Comments on the Outlook

I would like to see top-line growth improve because analysts’ estimates are very lackluster. a growth of 1% or less is not something many investors would like to own in their portfolios, and if the company is not improving operationally, which I think is even more important than top-line growth, then the company will be trading at such a low multiple for a while and justifiably so.

The continuation of building its electric fleet will be a tough mission to get through. Just looking at the company’s competitor Hertz (HTZ), reported a worse-than-expected loss in Q4 due to the high cost of repairs and maintenance of the EV fleet. This has forced the company to abandon its plan to electrify 20,000 of its vehicles in favor of gas-powered vehicles. That is a big shift, and I think it’ll be the same story for Avis too. EVs still seem to be in the very early stages of mass market production and are too expensive to look after, which means current generation EVs are not worth the effort. Maybe once the next generation of EVs comes around, the cost of repairs will be on par with ICE at least, but for now, the company may scale back its efforts also.

If it is going to go full speed into the EV transition, I would expect its margins to continue to contract and profitability to wane, which most likely will force the management to shift course as well, just like its competition.

Valuation

I will be approaching the valuation model as I usually do, with a conservative mindset. That way my margin of safety is higher and I don’t overpay for a company. So, for the revenues, I went with hardly any growth for the base case, around 1.4% per year for the next decade. This seems very conservative but analysts are expecting no catalysts. I also went ahead and modeled a more conservative scenario and a more optimistic one to give myself a range of possible outcomes. Below are those assumptions, and their respective CAGRs.

In terms of margins, I went with analysts’ estimates that the company’s EPS would halve and then start to come back over time and grow at around 10% CAGR for the next decade after halving. Below are these estimates.

For the DCF model, I went with the company’s WACC of 9.50% as my discount rate and 1% terminal growth rate. Furthermore, I decided to discount the final intrinsic value by 50% to account for the subpar balance sheet and the lack of top-line growth, which may be the reason the company trades at such a low PE ratio. With that said, Avis’s intrinsic value is around $137 a share, meaning the company is still trading at a premium to its fair value.

Closing Comments

It seems that the company is trading at such a low PE ratio for a reason. The company’s lack of top-line growth and enormous debt pile keep investors away from it. Furthermore, the company has a 14.5% short interest on its float, which could mean a short squeeze if the company becomes more enticing to investors or the share price may continue to go down due to inefficiencies in its operations. I am assigning the company a hold rating until I see massive improvements in the top line or earnings but that will take a few quarters to find out.

The company is trading near its 52-week lows and $150 seems to be a bit of a support, however, if the earnings are not great, I don’t see how it will hold.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget Group: Not A Great Time To Start A Position appeared first on Up2info.com.

• Avis Budget Group, Inc. is facing pressure from rising interest rates and a shift towards car-sharing services, impacting its access to capital and share price volatility.
• The company operates in the American car rental industry with a diverse portfolio of brands but faces competition from companies like Ryder System, Inc. and Hertz Global Holdings, Inc.
• The car rental sector is undergoing significant transformation due to the rise of car-sharing services, presenting both opportunities and challenges for companies like CAR.

Investment Rundown

Avis Budget Group, Inc. (NASDAQ:CAR) stock has gone down over 17% in the last 12 months and the question arises if CAR will continue to slide in valuation. I do think that this will continue because the rise in interest rates is putting pressure on everyday Americans’ spending power. With less capital available leaves less capital available for car rental companies like CAR to have access to. Besides, the share price has been incredibly volatile for the company and the industry is steadily seeing shifts towards car-sharing services rather than rental. CAR will likely need to invest quite heavily to maintain a strong position here and keep up with competitors. I think the coming quarters will continue to see a rise in long-term debts and that might put pressure on the bottom line as interest expenses rise. CAR is a larger business with TTM revenues of over $12 billion, putting it at a p/s of under 0.6 on an FWD basis. I still think it’s rather risky as the disruption caused by car-sharing services may impact coming results for CAR unless their Zipcar asset grows rapidly and offsets losses in other markets. Because of these uncertainties, I am more comfortable rating CAR a hold for now, and potentially a buy, depending on how the industry evolves. It should be said that investors are still getting quite a lot of value from holding shares as CAR continues to quite aggressively buy back shares right now.

Company Segments

Based in New Jersey, CAR operates in the American car rental industry, maintaining a robust fleet of approximately 19,000 vehicles. The company takes pride in its diverse portfolio of renowned brands, such as Avis Car Rental, Budget Rent a Car, Payless Car Rental, and Zipcar. This extensive array of brands positions CAR as a leading force in the car rental market, catering to a wide range of customer preferences and needs.

CAR continues to have a strong presence in the car rental service industry but it is under a lot of pressure from companies like Ryder System, Inc. (R) and Hertz Global Holdings, Inc. (HTZ). The company saw a spike in the bottom line margins in the last few years but the market and industry are still faced with a lot of uncertainties and risks. CAR does have exposure to this market thanks to its ownership in Zipcar, but needs to in my opinion invest significantly here to gain market share and retain it as well.

The rental car sector is currently witnessing a significant transformation, largely shaped by the ascendance of car-sharing services. Car sharing represents a departure from the traditional model of car rental, allowing consumers to rent vehicles for shorter durations and from various locations, often sourced from individuals or smaller operators. The market for car sharing in the US alone is expected to grow by around 13.8% annually until 2028, presenting a massive opportunity for companies to enter and take advantage of the growing demand.

This shift has introduced a new level of convenience for consumers, especially those who do not require a car regularly. Car sharing provides a flexible solution, enabling individuals to access vehicles when needed without the financial commitments associated with outright ownership. This transformative trend not only reflects changing consumer preferences but also has substantial implications for the dynamics of the rental car market. As the industry adapts to these evolving patterns, companies like CAR are navigating through this new terrain to meet the emerging needs of contemporary consumers. There is no lack of companies trying to enter this market and I think it will be tough for CAR to reticent their margins because of the hefty amount of capital likely necessary to maintain a strong position here. It might be a race to the bottom eventually as more companies enter and are trying to undercut each other. I don’t like that scenario and is a key reason why I can’t rate the business a buy right now.

Earnings Highlights

The last earnings report from the company showcased a slight increase in the revenues, but no more than 1% even. The higher interest rates in the US and internationally are putting pressure on people’s capabilities to spend and services that CAR are offering become a lower priority for a lot of people. Rates seem to have impacted CAR as well and the bottom line decreased by 39% YoY, which has given way to the high amount of short interest circulating the company currently.

A big cause was also the depreciation of vehicles for the company as well as lease charges. This went from $134 million in Q3 of FY2022 up to $517 million in Q3 FY2023. The vehicle interest also increased by $100 million further which resulted in total expenses rising by over $600 million all the whilst the revenue of the company stayed flat.

Looking closer at Zipcar as a brand and asset for the company it’s included in other revenues for the company and last quarter did show a trend appearing where it’s declining. I think the. growth opportunity for Zipcar is there but the current market climate may not support any rapid growth. At the valuation that we will get to below, I still think a hold is reasonable as the risks seem to be accounted for right now in it.

The Americas continues to be the largest market for the company right now and the rental days here increased by 7% YoY, which was a welcomed positive sign last quarter. Revenue per day decreased though, which shows that the pricing environment might not be that solid for CAR and competition is still stiff. Furthermore, the utilization rate for the company decreased to 70.3%. This has been visible as well in the ROA of the company, which peaked at over 10% in the last quarter of 2022 and now is below 6%. I do think further depreciation here will be visible and that means a lower valuation is justified and a buy rating is hard to make as well.

One of the largest companies and peers to CAR is HTZ. When looking at the valuation of these companies they trade very low on a p/s scale, CAR at 0.56 and HTZ at 0.27. I think a key reason for CAR trading at a slightly higher multiple has to do with their stronger margins in comparison to HTZ. The gross margins are at 41% and over the last 10 years have seen the top line growing at 4.44% CAGR. Moving to HTZ they have gross margins at 25% and have the last decade actually seen its topline retreat and post an average decline of 1.33% during that same period. I think this shows that perhaps CAR may be the superior growth opportunity, but as I have stated before, not at a point where it’s enough convincing to make a buy.

Risks

As an increasing number of companies delve into the car-sharing industry, there emerges a notable risk of a “race to the bottom.” This scenario entails fierce competition where companies attempt to outdo each other by slashing prices to secure a larger market share. This intensified competition may result in thinner profit margins for companies, including CAR, compared to what is currently reflected in their valuation.

Moreover, the persistent threat of higher interest rates poses an additional challenge to profitability. If interest rates continue to rise and remain elevated for an extended period, it’s conceivable that CAR’s valuation might experience downward pressure, potentially leading to a reduction in its trading multiple. Higher interest rates often lead to more pressure on the bottom lines as interest expenses grow. The evolving landscape of the car-sharing industry, coupled with economic factors like interest rates, underscores the need for companies to strategize effectively to maintain a competitive edge and financial resilience in the face of these challenges.

Final Words

The car rental industry is quite interesting to follow as in many ways it’s a good reflection of how consumers spending power looks. The demand for CAR has not appreciated very much as the revenues stayed largely flat YoY. Furthermore, the higher interest rates and large depreciation of vehicles and other assets have helped result in a 39% YoY decrease in net incomes as seen in the last earnings report. I think that CAR is also at a point where it needs to allocate a lot of capital to Zipcar to gain market share in the growing car-sharing industry, which is disrupting the more traditional car rental industry. Right now the results are trending the wrong way but I think the risks are baked in with the current company valuation and a hold rating can be justified here.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget Group: Struggling In An Industry Faced With Disruption appeared first on Up2info.com.

• Avis Budget Group has underperformed the S&P 500 since going public in 1997 but has outperformed over the past 10 years.
• CAR is a cheap stock as investors are skeptical regarding the company’s future prospects.
• CAR has delivered strong results over the past few years and has repurchased nearly 50% of its outstanding shares over the past 3 years.
• CAR trades cheap relative to the S&P 500 due to the highly volatile nature of earnings.
• I am initiating CAR with a buy rating and would consider downgrading the company if financial performance falters or the stock rises and is no longer attractively valued.

Avis Budget Group (NASDAQ:CAR) became a public company in 1997. Since then, CAR shares have proved a disappointing investment. Since going public, CAR has delivered a total return of 616.3% compared to a total return of 1,330% delivered by the S&P 500. However, CAR has performed much better over recent time frames delivering a total return of 486% over the past 10 years compared to a return of 194% delivered by the S&P 500.

While the level of competition in CAR’s core rental car business has increased over the past few years the company has been able to deliver solid financial performance. However, investors are not confident that this will continue to be the case.

By nearly any metric CAR is a cheap stock. CAR trades at just 4.2x trailing earnings, 7.7x consensus 2024 earnings, and 9.7x trailing EV / EBITDA. However, the stock is cheap for a reason and further analysis is required to determine if CAR is a value play or value trap.

Company Overview

CAR is a leading global provider of rental car services. The company’s most recognized brands include Avis, Budget, and Zipcar. In markets which CAR does not operate in directly, the company licenses the use of its brands to external parties which operate the company’s brands in ~180 countries globally.

CAR has a total of 10,250 rental car locations across the world including 3,900 locations operated by licensees. CAR has a total fleet of ~655,000 vehicles.

The company operates in two segments: Americas and International. ~77% of total revenue is generated by the Americas division with the remaining ~23% being generated by the International segment.

Highly Competitive & Cyclical Business

CAR faces a significant amount of competition in the rental car business. CAR’s biggest competitors include Hertz (HTZ), Enterprise, Europcar Mobility Group, and Sixt SE. The company also competes with smaller local and regional vehicle rental companies.

The emergence of ride sharing companies such as Uber (UBER) and Lyft (LYFT) in recent years has created additional competition as individuals often prefer to rely on UBER or LYFT as opposed to renting a car.

CAR’s business is highly cyclical as 64% of its revenue comes from the leisure category. Consumer travel is a discretionary expense and tends to rise and fall based on the overall strength of the economy.

Historically, CAR has experienced high earnings volatility and margin volatility and has achieved an average profit margin of 4.6% over the past 10 years.

Recent Financial Performance

In 2020, CAR suffered a massive drop in revenue and profits due to the COVID-19 pandemic which resulted in a significant drop in travel. Revenue recovered in 2021 back to pre-pandemic levels. In 2022, the company experienced a surge with revenue increasing ~29% on a year-over-year basis.

The revenue surge in 2022 was primarily driven by a 23% increase in volume and an 8% increase in revenue per day.

On November 1, 2023 CAR reported strong financial results which beat analyst estimates. The company reported revenue of $3.6 billion which was in line with what the company reported during the same period a year ago. EPS came in at $16.78 which was down from $21.67 during the same period a year ago.

The drop in EPS was driven by a drop in vehicle utilization rates and thus revenue per day.

CAR CEO Joe Ferraro noted that:

“October started off strong and we expect it to continue throughout the holiday season”

High Quality Balance Sheet

As of Q3 2023, CAR reported total debt of $4.7 billion and net debt of $4.13 billion. Over the past 12 months adjusted EBITDA has come in at $2.8 billion and thus the company has a net leverage ratio of just 1.5x.

In addition to having a relatively low leverage level, CAR has a well laddered maturity profile with most debt not coming due until 2027 or later. The well laddered maturity profile is important given the high level of cyclicality present in CAR’s business.

Share Buybacks

CAR has been aggressively returning capital to investors over the past few years via share repurchases. As shown by the chart below, CAR has reduced its total shares outstanding by ~48% over just the past three years.

During Q3 2023, the company repurchased ~2.2 million shares for a total cost of $487 million. CAR still has ~$ 1 billion remaining on its buyback authorization. The company continues to view share repurchases as attractive as noted by outgoing CFO Brian Choi on the Q3 earnings call:

“We also deployed nearly $500 million into repurchasing 2.2 million of our shares outstanding this quarter. Given that we strongly believe that our current share price does not reflect the fair value of our transformed company, we will continue to aggressively buy back shares until that gap closes and this will be reflected in the cash flow usage of our fourth quarter. The summer has built our war chest and we have built full confidence that substantial free cash flow will continue to be generated in 2024 and beyond. However, as we’ve said on previous calls, we will be nimble and opportunistic with regards to capital allocation and will consider all avenues of returning capital to shareholders.”

Given the fact that company currently has a market value of just ~$6.8 billion, the remaining $1 billion authorization represents a significant potential reduction in shares outstanding.

Valuation

CAR currently trades at 7.7x consensus 2024 earnings. Comparably, the S&P 500 currently trades at ~18x consensus 2024 earnings. Thus, on a relative basis CAR is trading at a much cheaper valuation.

CAR trades at a lower valuation because its earnings are much less stable than the S&P 500. While earnings have been volatile historically, the company has been profitable each year over the past 10 years with the exception of 2020. Moreover, while earnings growth has been uneven the company has delivered a 5 years EPS CAGR of 58%.

CAR’s closest public peer is Hertz (HTZ). CAR is trading roughly in line with HTZ based on forward P/E ratio and at a discount based on forward EV / EBITDA. Historically speaking CAR has been a better operator than HTZ. Proof of this can be seen in HTZ being forced to file bankruptcy in 2020 while CAR was able to ride out the storm. Additionally, CAR has been able to accelerate revenue growth vs the pre-pandemic period while HTZ revenue has only rebounded to pre-pandemic levels. For these reasons, I view CAR as highly attractive vs HTZ based on valuation. CAR is also trading at a significantly lower valuation than ride share competitors Uber (UBER) and Lyft (LYFT).

In addition to being attractive relative to the S&P 500 and its peers, CAR is also trading cheap relative to its historic norms.

While I view CAR as trading at a highly attractive based on consensus forward estimates, I actually believe there is a good chance that CAR exceeds expectations. As shown by the chart below, CAR has a very strong history of exceeding earnings estimates over the past few years.

Conclusion

In my view CAR is a value play.

While CAR operates in a fairly competitive business, the company has been able to generate solid profits despite challenges from ride share players such as Uber and Lyft.

CAR is currently experiencing very high levels of profitability due to a travel rebound from the disruption experienced during COVID-19. I expect strong financial performance to continue over the near-term.

CAR trades at a valuation which is much cheaper than the S&P 500 and in line with its direct peer, Hertz. While CAR has experienced highly volatile earnings historically it has been able to remain profitable each year over the past 10 years other than 2020. Moreover, the company has also been able to drive substantial earnings growth over the past 5 years despite increased competition from ride sharing players such as Uber and Lyft. Additionally, CAR has a strong history of delivering earnings which surpass analyst expectations.

CAR continued to be an aggressive repurchaser of its own stock as management continues to believe shares are undervalued. I view this as a positive signal given that management likely has better visibility into near-term prospects than the public investing community.

The primary short term risk to my positive view is a potential economic downturn. Given the highly cyclical nature of the rental car business, CAR would almost certainly experience significantly lower revenue and earnings during an economic downturn. However, the company has only modest levels of debt and thus I believe would be able to ride out any economic storm. CAR may even benefit over the long-term if it is able to take share from weaker rivals during an economic downturn.

I am initiating CAR with a buy rating and would consider downgrading the company if financial performance comes in weaker than expected going forward. I would also consider downgrading the stock if it rises significantly from here and the valuation becomes less attractive.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget Group: Value Play Or Value Trap? appeared first on Up2info.com.

• Avis Budget Group, a prominent player in the rental car industry, is facing disruption from car-sharing services.
• The rise of car-sharing has increased the supply of rental cars and lowered prices, potentially impacting Avis’ profitability.
• Avis’ heavy reliance on airport sales and plateauing revenue growth are additional challenges investors should consider.

Introduction

Ah capitalism, the creative force which can both create and destroy wealth and power. Over the course of time, capitalism has led the way to scores of new industries, while at the same destroying so many old ones. Gone are the days when milk is delivered by the milkman, heck, for many of us, gone are the days of drinking milk entirely!

It’s often hard to see these changes before it’s too late, many genuinely smart investors were blindsided as their investments crumbled due to changing times. One industry that I believe is particularly ripe for disruption is the rental car industry, and specifically Avis Budget Group (NASDAQ:CAR).

Despite the spectacular stock run, increasing almost 600% over the past 5 years, I believe now may be a good time for investors to re-approach their investment thesis with an increased focus on rationality and the true long-term potential.

Therefore, within this article, I’ll examine the challenges that I believe Avis will face in the coming years, its financial performance, and where I believe the stock could go from here.

A Company and Industry at the Cross-Roads

Avis Budget Group, headquartered in New Jersey, stands as a prominent figure in the American car rental scene with a fleet that comprises ~19,000 vehicles. Avis boasts a portfolio of well-recognized brands including Avis Car Rental, Budget Rent a Car, Payless Car Rental, and Zipcar. In terms of market share, Avis controlled around 26% of the market in 2021, cementing itself as a key player in the US rental car industry. However, it’s worth noting that its market presence falls behind industry giants: Hertz Global Holdings and Enterprise Holdings.

Historically, Avis has been no stranger to M&A maneuvers, often using acquisitions to fuel its growth, especially across different global regions. Notable instances include the 2011 acquisition of Avis Europe, a licensee that effectively unified the Avis and Budget brands worldwide. Looking further, the company broadened its international footprint by purchasing Apex Car Rentals of New Zealand in 2012, and Maggiore Group, Italy’s fourth-largest vehicle rental firm in the country, in 2015. Acquiring these foreign companies allowed Avis to replicate its business model in new geographies and enabled cost synergies as the company could provide shared services like accounting and IT to new subsidiaries at a lower cost.

Changing Times

The rental car industry is undergoing a massive transformation due to the rise of car-sharing services. Car sharing has created an alternative to the traditional car rental model by allowing customers to rent cars for less time and/or in different places from individuals and small operators.

Car sharing has introduced a new level of convenience to consumers. It appeals to those who do not require a car on a regular basis, as they can access vehicles when needed without the financial burden associated with outright ownership.

This shift in consumer behavior is particularly prominent among millennials and Gen-Z, as they seek more convenient and cost-effective solutions to get around town. The convenience of picking up a vehicle nearby for short trips, coupled with digital booking and payment options, has attracted a significant young customer base. Younger Americans, many of whom grew up with services like Uber (UBER) and Airbnb (ABNB), are likely to gravitate towards services like Turo, Zipcar (owned by Avis), and the many other companies operating in the industry.

While Avis had the foresight to enter the industry through its acquisition of Zipcar, there’s no promise that this new business model will be anywhere near as profitable as the old model.

First, the creation of these rental apps greatly increases the supply of rental cars on the market as almost anyone with a decent car could now, at least theoretically, rent their car when they know they won’t need it for a few days. Secondly, these new suppliers have lower overhead costs as they don’t need to hire staff or rent expensive lots as they often utilize their own real estate and time.

Think back to Economics 101: rapidly increasing supply with static demand is expected to yield what?

Lower prices.

This is why I think investors may getting a bit ahead of themselves. The growth of this industry might not yield the profits that, so many, seem to be banking on.

Domestic and Airport Focus

As of 2021, around 66% of Avis’ business came from on-airport sales, meaning the performance of their business is strongly tied to ongoing air travel demand. Since most air travel is discretionary, this has historically been one of the first areas consumers cut in times of slowing economic growth or recession. While its exposure to airports may be troublesome, I’m more positive about its US exposure. Since 80% of its sales come from the US, Avis is closely tied to, arguably, the strongest economy in the world (lower inflation, and faster growth compared to most of the developed world).

Financials and Valuation

Revenue Growth

Thinking back to Avis’ strong association with the air travel industry, I thought it worthwhile to compare its revenue growth against United Airlines (UAL) a company that I recently wrote about on Seeking Alpha. Looking back over the past 5 years, you can see the impact of decreased air travel on Avis’ car rental business. Something to note here is that Avis’ revenue growth has begun to stall even though air travel continues to increase, which, in my view, indicates that a short-term peak in demand for car rentals may have been reached.

EPS Growth Worries

While revenue growth at Avis has flattened, its EPS has begun to drop sharply even as United Airlines’ EPS continues to grow. In the realm of EPS, all is not bad at Avis as their EPS is still significantly above where it was pre-pandemic, the same cannot be said about United.

Return on Invested Capital

In the past, Avis has been a poor capital allocator, generating a meager ~1-2% return on invested capital. Since the pandemic ended, returns on invested capital have surged to the low double digits, while this is an impressive improvement, it’s still a bit below what I look for in companies I invest in.

Given the recent decline in returns on invested capital at Avis’ consider me skeptical whether they can maintain returns at these levels.

Valuation

On an absolute basis, and compared to Hertz (HTZ), at 5.9x forward earnings, Avis trades at a fair multiple. Still, compared to where it traded just last year this is markedly higher, despite greater risks vis-a-vis flat revenues and falling earnings.

Conclusion

Avis stands at a critical juncture. Despite that remarkable stock price surge, challenges loom with the disruptive force of car sharing reshaping the landscape. Avis’ strategic acquisitions and significant market presence don’t shield it from the impacts of oversupply and lowered prices inherent in car sharing. Heavy reliance on airport sales and plateauing revenue growth warrant careful consideration.

As the industry navigates changing times, investors should tread carefully, while car sharing provides an avenue for growth, there’s no promise of sustained profits. The multiple expansion over the past year in the face of growing risks leaves me worried.

All that said, I rate Avis Budget Group a “Sell”.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget Group: Ripe For Disruption appeared first on Up2info.com.

• Avis Budget Group (CAR) faces a bleak financial outlook and increased competition from ride-sharing services and car-sharing platforms, posing risks to its market share and profitability.
• Despite past strong performance, CAR’s growing debt, interest expenses, and industry trends make it a potentially risky investment at its current price.
• The recommendation is to hold off on investing until the company proves its resilience or the industry landscape stabilizes.

Investment Thesis

Avis Budget Group (NASDAQ:CAR) is a provider of vehicle rental and car-sharing services. It operates in the US, Europe, the Middle East, Africa, Asia, and Australia. Since 2022, the stock has fluctuated significantly, ranging as high as $300 per share and as low as $138. CAR seems like a bargain now that it has settled in at slightly over $200 per share.

However, before making an investment decision here, investors ought to evaluate the trends in the industry and how detrimental they could be as far as their investment is concerned. This analysis should be done against the company’s fundamentals to make an informed decision. Upon doing such an evaluation, the future is blurred, as shown by the company’s downward trajectory financial forecasts, especially the bottom lines.

Given these blurred future financial projections and the risks associated with the trends in the industry, I hold my cards close to my chest regarding investing here.

CAR’s Business Model

The company buys a fleet of cars from different makers at prices that have been negotiated. They keep a variety of cars, trucks, and other vehicles in their fleet to meet the wants of a wide range of customers. The price of buying and taking care of these cars is a big operating cost. The main income source is renting out these automobiles to customers, both private and commercial. Customers pay a charge to rent a car on a daily, weekly, or monthly basis. The vehicle type, rental length, location, and season can all affect price. Another source of income is from long-term leases.

They also provide additional services in addition to the standard rental rate for an additional fee. These might include fuel service options, GPS navigation systems, car seats, Wi-Fi, and insurance waivers. The corporation also receives revenue from late return fees, one-way rental costs, and concession recovery fees.

The company has partnerships with a number of airlines, hotels, and other travel-related businesses, which offer deals and bring in a consistent flow of renters to Avis. The business also offers benefits and prizes to loyal customers through loyalty programs, which promote repeat business.

What Has Been and Its Implication, And Expectation In Future

CAR has consistently posted record-breaking revenue, net income, and adjusted Ebitda, displaying exceptional performance. This achievement can be credited to a combination of stable consumer demand in domestic and foreign markets and a favorable price environment. To evaluate this trend, I will track the company’s financials for the last ten years.

In light of this, the company’s improved cost-of-revenue efficiency can be seen in the gross margins, which increased from 29% in 2013 to 50% in 2022. The more striking statistic on the income statement is how Avis controlled operating costs. While revenue surged by 51% between 2013 and 2022, from $7.9 billion to almost $12 billion, total operating expenses only rose by 30%, from $1.3 billion to $1.7 billion. The corporation reduced the total number of outstanding shares by approximately 60% over that time, from 106.9 million to 39.8 million. The continuous share repurchasing, in my view, has been instrumental as it improves shareholder value even more.

Moving from the ten-year financial performance to the shareholders’ position currently after this strong growth, the stock hasn’t had a particularly fantastic run recently. The share price dropped 10% in the most recent quarter, certainly not pleasing shareholders. The returns over the past three years have been remarkable despite this, though. In the longer run (3 years), the share price has increased by about 969%. According to long-term investors, the current decline doesn’t really affect the longer-term picture much. If there is still too much excitement surrounding the company’s future, it is something to think about.

Regarding the future, the financial estimates, as represented in the investment thesis section, point out a bleak outlook that could be very detrimental. Further, its long-term debt has increased from $3.3 billion to $4.6 billion, and its interest expense is about $800 million. Looking at these figures against a bleak financial outlook, then in my mind, mirrors a skeptical view of investing here.

The Industry Trends: The Apparent Risks?

One industry trend that poses a major risk to investing in Avis is the shift towards alternative transportation options, including ride-sharing services and car-sharing platforms. These emerging trends have disrupted the traditional car rental business model and threaten Avis’s market share and profitability.

The increased popularity of ride-sharing services like Uber and Lyft has made it more convenient for consumers to access transportation without needing to rent a car. This trend has the potential to reduce the demand for this company’s rental vehicles, leading to a revenue decline.

Additionally, the rise of car-sharing platforms like Zipcar and Turo has provided consumers with a flexible and cost-effective alternative to traditional car rentals. These platforms allow individuals to rent out their own vehicles or access shared vehicles on-demand, eliminating the need for a dedicated rental car company. This trend further erodes the customer base and market share of companies like Avis.

To adapt to these industry trends, the company has made efforts to invest in its own car-sharing services, expand its presence in ride-hailing partnerships, and develop innovative mobility solutions. However, the company’s ability to successfully navigate this changing landscape remains a risk, as competition in the space continues to escalate and disrupt the traditional car rental industry.

Conclusion

It is no doubt that Avis has been excellent in the past, but with the dynamics in the industry and the bleak outlook in its financials, I don’t think now is a good entry point. Further, the company’s growing debt and interest expenses at a time when the industry is becoming competitive, and financials are estimated to decline to add more downside potential to this stock. In my view, this company is faced with a potentially strong downside in the future based on the risks. As a result, I recommend holding until these storms stabilize or until the company proves to be resilient to the looming adverse climate.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article was researched and written by January Mbuvi Of Fade The Market.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget Group: Hold, The Future Is Blurred appeared first on Up2info.com.

• Avis Budget Group, Inc. provides car and truck rentals, car sharing, and related products and services to consumers and businesses worldwide.
• Avis has seen margins expand rapidly as second-hand cars increase in value and demand remains at historically high levels.
• We see margins contracting and demand softening as conditions normalize in the coming 12-36 months. Despite this, the coming is attractive relative to peers.
• Management has used these gains to raise debt and fund buybacks, leaving the coming highly leveraged.
• On a forward basis, Avis looks to be valued close to its fair value / potentially at a discount.

Investment thesis

Avis has seen a rise to prominence in recent years, as demand has exploded for its services. Since then, the share price has been highly volatile as investors assess where the long-term outlook on the business is. Our objective is to assess the company’s financial performance as a means of providing this perspective to the conversation.

Company description

Avis Budget Group, Inc. (NASDAQ:CAR) provides car and truck rentals, car sharing, and related products and services to consumers and businesses worldwide through its various brands, including Avis, Budget, and Zipcar.

The company offers premium vehicle rental and mobility solutions to commercial and leisure segments of the travel industry under the Avis brand and provides one-way truck and cargo van rental services through its Budget Truck brand. It also operates a car-sharing network under the Zipcar brand. In addition to rental services, the company offers a range of supporting services.

Share price

Avis’ share price had an uneventful time leading up to 2021, with the share price trending down. This was driven by the relatively mild economics of the company’s operations. In 2021, we saw a large rise in share price driven by a fantastic performance in the post-lockdown period, alongside a squeeze on shorters. Since then, the share price has been quite volatile, as markets attempt to assess where the “new normal” is.

Financial analysis

Presented above is Avis Budget’s financial performance for the last decade. Our view is that the company is fundamentally overperforming currently, with little evidence to suggest the sustainability of these levels.

Revenue

Revenue has grown at a CAGR of 5%, driven predominantly by the most recent trading periods. Before this, the company achieved low single digits, which is a reflection of the maturity of the industry.

The COVID-19 pandemic has drastically impacted the travel industry, with a significant decline in travel across the world. However, this led to a rise in domestic travel and road trips, as consumers were unable to go overseas but still sought a holiday. This is the primary reason revenue was able to bounce back to the degree it did in FY21, and is a contributing factor to the continued growth of the business.

Another factor driving revenue in recent years is an aggressive pricing strategy. Avis has been increasing its rental prices consistently without seeing demand miss a beat, driving record gains. This has been possible in part due to a shortage of cars, which has contributed to an imbalance of supply and demand across many vehicle-related industries. The chip shortage impact is subsiding but will remain an issue in the medium term, which could mean continued inflated prices across many related industries. This does pose an issue for Avis as expanding its fleet will be more expensive and potentially take longer if deliveries are delayed.

Avis and its peers have been disrupted by the rise of ride-sharing services as these companies have been focusing on convenience and low costs. Internally supporting apps allow tourists to land in a location and immediately access vehicle travel, which is something that was previously more complicated. Further, these ride-sharing services have undercut traditional taxi services, making it more cost-effective to use this form of transportation.

The emergence of subscription-based car rental services, or “car-sharing” services, has contributed to improving growth in the industry. This is where customers pay a monthly fee for access to a fleet of vehicles or a daily/hourly rate. This model offers customers more flexibility and convenience compared to traditional car rental, with Avis expanding into this segment via its Zipcar brand. Our view is that this segment represents a fantastic opportunity to be a growth driver, as it offsets the impact of the above point while giving consumers more of a reason to rent a vehicle. Where previously an individual would take a taxi as they are only intending for a couple of hours, they can now easily take a car-share which is far cheaper. Further, it continues to support the domestic tourism industry as it gives people more flexibility in traveling.

In the short term, we could see demand soften due to economic factors. Inflationary pressures are contributing to a decline in discretionary income, as consumers see their cost of living sour. With this occurring, many will likely avoid or defer tourism, either because they cannot afford it or because it is not a logical decision. For this reason, we could see demand either soften or decline. In the most recent quarter, sales were up 8%, which suggests the company is not feeling the impact yet.

As travel numbers continue to rise, especially with China finally seeing the end of Covid-19, we should see continued growth in the medium term. Our view is that any outperformance will be driven by innovation in services such as Zipcar. This being said, there are question marks around the near-term performance of the business.

Margins and costs

The impact of pricing power has translated directly to GP, with margins rising from 28-30% to 50%. Further, we are seeing the impact of the rise in second-hand car prices. The following illustrates the degree to which prices have risen.

With Avis’ fleet value rising, the company is depreciating its cars more slowly, contributing to a sharp decline in this expense. The following are two excerpts from quarterly reports, one from 2019 and the other from 2022.

As the following illustrates, pricing has contributed to a greater revenue per day but a big factor is also a reduction in per-unit fleet costs.

The key to the sustainability of this is whether demand will continue to remain at the level it is, otherwise we could see prices declining as quickly as they rose. Further, we need to consider if the fleet will remain valued at the level it is, or if the car market sees a softening of prices.

Our view is that demand will likely soften, as inflationary pressures have only compounded across the last few quarters. Consumers can only take so much before we see demand really begins to nosedive. For the second-hand market, we believe this will begin to soften. The FT believes the chip shortage impact will ease by the end of 2023, with many automakers over-ordering chips to avoid a repeat of this in the future. With these assumptions in mind, Avis’ margins should begin to revert toward prior levels in FY23.

Balance Sheet

Moving onto the balance sheet, Avis has used these superior returns to aggressively buy back shares and raise debt. We have seen net debt grow at a rate of 8% across the historical period, reaching over $20BN. At these levels, the company’s net debt to EBITDA coverage is 3.5x, which is above optimal in our view. This has contributed to a sizeable annual interest payment, with this expense representing 5% of revenue. Our view is that this is problematic for the business as if profitability does begin to decline, Avis could quickly find itself in trouble.

Outlook

Presented above is Wall Street’s consensus view on the coming 5 years.

Revenue is expected to slow to a standstill, with a growth rate of 1%. This is likely based on the assumption that we are currently experiencing outsized demand, which will contribute to a slowdown in the coming years as things normalize. We concur with this view although expect FY23 to perform worse.

Analysts are expecting margins to contract rapidly, with EBITDA-M more than halving within one year. This is based on the factors we have mentioned previously. Our view does align, although we do not expect such an aggressive correction in margins in FY23.

Peer analysis

Presented above is Seeking Alpha’s profitability rating for Avis, which is based on a relative comparison to its peers.

Unsurprisingly, Avis scores incredibly well, with its current outsized returns far ahead of others. What is more important for us in this breakdown is what the peer averages are, namely an EBITDA-M of 13% and a NI-M of 7%. These levels are very similar to Avis’ historical performance and below its forecast performance. This suggests inherent value in the business should margins contract.

For the same reason Avis scores well for profitability, it scores poorly for growth. With a sharp margin contraction expected, the forecast period looks far worse than its peers. Interestingly, peers are expected to grow, suggesting resilience in the sector against economic headwinds. This has the potential to offset the impact on Avis if the company outperforms the forecasts.

Valuation

Based on what we know, looking at Avis’ forward-looking valuation metrics is key to assessing the business. Avis stock surprisingly looks quite attractive, trading at a minuscule 6x NTM P/E ratio. Further, its sales and EBIT margins are quite attractive too. This to us suggests markets are finding it very difficult to price this asset, given the uncertainty of the coming 12-24 months.

Final thoughts

Avis has done a great job of exploiting current market conditions to maximize its profitability. Its normalized profitability profile is attractive, with our view being that Avis will revert toward this in the coming 12-36 months. We are not a fan of how Management has utilized these short-term gains, potentially leaving the coming overleveraged. On a relative basis, Avis is quite attractive at its normal profitability levels, while trading at an earnings discount to its peers.

We see Avis as a risky investment currently. It is difficult to forecast how margin contraction will play out, the degree to which demand will soften, the impact of vehicle values declining, and whether debt levels are too high once performance normalizes.

On a risk-to-reward basis, we would suggest hesitancy and patience, as a means of gaining greater clarity over the risks we have identified above.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget: Margin Correction Will Be Large appeared first on Up2info.com.

• A 3-5 month prospect from here of CAR share prices could reasonably range from a $172.43 low to a $215.91 high from its $185.77 present price, a gain of +16.2%. – source: blockdesk.com.
• 86 positions like today’s in the past 5 years of 1,261 market days produced average net gains at 17.9% each during 31 market days (1 ½ months of 21 each).
• Those annual reward rates of +286% CAGR in holding periods had worst price drawdown risks of only -8.3%.

The primary interest in this article is on Avis Budget Group, Inc. (NASDAQ:CAR)

Investment Portfolio Discipline Summary

This analysis focuses on active investment near-term (3-5 month) stock price gain portfolio performance measurement. Fund investments in equities appeal whenever Market-Maker volume transaction hedging activity forecasts that 80% or more of a subject stock’s near-coming price range is expected to be to the upside and 10% or less may be to the downside.

At the time of each purchase a GTC sell order for all of those just bought shares is placed with the broker where bought. His system will monitor and direct investors to the sale confirmation when accomplished, probably with encouragement for reinvestment.

At the time of a buy, only on the investor’s own personal private calendar, a note to review this holding at 3 months after the purchase, Then, if it is not yet sold, but is priced at a loss, it should be sold and the proceeds put back into the reinvestment stream. If held at a gain less than the forecast target, after considering alternatives, a decision to sell or move the calendar note a month further forward (once) is proper.”

Source: blockdesk.com

Description of Primary Investment Candidate

Avis Budget Group, Inc., together with its subsidiaries, provides car and truck rentals, car sharing, and ancillary products and services to businesses and consumers in the Americas, Europe, the Middle East and Africa, Asia, and Australasia. It operates the Avis brand,; the Budget Truck brand, a fleet of approximately 19,000 vehicles, which are rented through a network of approximately 415 dealer-operated and 390 company-operated locations in the continental United States; and the Zipcar brand, a car sharing network. The company also operates various other car rental brands, such as Budget, Payless. The company was formerly known as Cendant Corporation and changed its name to Avis Budget Group, Inc. in September 2006. Avis Budget Group, Inc. was founded in 1946 and is headquartered in Parsippany, New Jersey.”

Source: Yahoo Finance

These growth estimates have been made by and are collected from Wall Street analysts to suggest what conventional methodology currently produces. The typical variations across forecast horizons of different time periods illustrate the difficulty of making value comparisons when the forecast horizon is not clearly defined

Alternative Transport Rental Service Industry Investments Compared

Here are several businesses similar to Avis Budget Group, Inc. Following the same analysis as with CAR, historic sampling of today’s Risk~Reward balances were taken for each of the alternative investments. They are mapped out in Figure 1.

Expected rewards for these securities are the greatest gains from current closing market price seen worth protecting short positions. Their measure is on the horizontal green scale.

The risk dimension is of actual price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the red vertical scale.

Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line. Capital-gain attractive to-buy issues are in the directions down and to the right.

Our principal interest is in CAR at location [9], at the lower right frontier of Figure 1 forecasts. A “market index” norm of reward~risk tradeoffs is offered by SPY at [15]. Most appealing (to own) by this Figure 1 view may appear to be CVNA. But other reasons to commit capital often also exist, so please see Figure 2.

Comparing features of Alternative Investment Stocks

The Figure 1 map provides a good visual comparison of the two most important aspects of every equity investment in the short term. There are other aspects of comparison which this map sometimes does not communicate well, particularly when general market perspectives like those of SPY are involved. Where questions of “how likely’ are present other comparative tables, like Figure 2, may be useful.

Yellow highlighting of the table’s cells emphasize factors important to securities valuations and the security CAR, most promising of near capital gain as ranked in column [R].

Figure 2

Why do all this math?

Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the prospective price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how SOON it may happen, and d) what price drawdown RISK may be encountered during its holding period.

Readers familiar with our analysis methods after quick examination of Figure 2 may wish to skip to the next section viewing Price range forecast trends for CAR.

Column headers for Figure 2 define investment-choice preference elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with yellow fills are of data for the stocks of principal interest and of all issues at the ranking column, [R].

The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.

[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are emotionally most likely to accept losses.

The Range Index [G] tells where today’s price lies relative to the MM community’s forecast of upper and lower limits of coming prices. Its numeric is the percentage proportion of the full low to high forecast seen below the current market price.

[H] tells what proportion of the [L] sample of prior like-balance forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences.

What makes CAR most attractive in the group at this point in time is its basic strength of reward to risk ratio of 2.0 to 1 in [T], more than the brevity of holdings needed to reach closeout prices..

Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 – H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among alternative candidate securities, with CAR in top rank.

Along with the candidate-specific stocks these selection considerations are provided for the averages of near 3000 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P 500 Index ETF (SPY) as an equity-market proxy.

Current-market index SPY is not competitive as an investment alternative. Its Range Index of 38 indicates 62% of its forecast range is to the upside, but Less than 3/4ths of previous SPY forecasts at this range index produced profitable outcomes, with enough losers to put its average payoff in low single-digit positive result.

As shown in column [T] of figure 2, those levels vary significantly between stocks. What matters is the net profit between investment gains and losses actually achieved following the forecasts, shown in column [I]. The Win Odds of [H] tells what proportion of the Sample RIs of each stock were profitable. Odds below 80% often have proven to lack reliability.

Recent PriceRange Forecast Trends for CAR

Figure 3

No, this is not a “technical analysis chart” I am showing only historical data. It is a Behavioral Analysis picture of the Market-Making community’s actions in hedging investments of the subject. Those actions define expected price change limits shown as vertical bars with a heavy dot at the closing price on the date of the forecast.

It is an actual picture of the expected future prices for CAR made by experienced market professionals, not a simple hope of a recurrence of the past. Expectations backed up by significant bets of investment capital made to protect market-makers or earn a proprietary profit from risk-taking.

The special value of such pictures is their ability to immediately communicate the balance of expectation attitudes between optimism and pessimism. We quantify that balance by calculating what proportion of the price-range uncertainty lies to the downside, between the current market price and the lower expected limit, labeled the Range Index [RI].

A RI at zero indicates no further price decline is likely, but not guaranteed. The odds of 3 months passing without either reaching or exceeding the upper forecast limit or being at that time below the expected lower price (today’s) are quite slight.

The probability function of price changes for CAR are pictured by the (thumbnail) lower Figure 3 frequency distribution of the past 5 years of RI values with the today value indicated.

Conclusion

The multi-path valuations explored by the analysis covered in Figure 2 is rich testimony to the near-future value prospect advantage of a current investment in Avis Budget Group, Inc. over and above the other compared alternative investment candidates.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CAR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, and discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in the coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided, both on blockdesk.com and on our Seeking Alpha Contributor website.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget Group: Today’s Best Nearby Cap-Gain Transport Rental Stock Prospect appeared first on Up2info.com.

• Avis Budget Group saw a surge in travel after the worst of the pandemic was over, but the future is still uncertain.
• ROE and EPS have been boosted in the short term by debt levels and share count reduction.
• There isn’t enough potential upside to justify the fundamental risk, especially at current prices.

Avis Budget Group (NASDAQ:CAR) is a top three rental car company in the world. Founded in 1946, it has been a public company since 1981. They operate several different rental brands as well as a the car sharing network known as Zipcar. Their main competitors are HTZ and privately owned Enterprise Rent-A-Car. The industry is estimated to grow at 7.5% until 2029. Below is the long term share price performance:

Next are the return on capital metrics versus peers:

Click to enlarge

Source

They’ve routinely had good gross margins of around 70%, but operating margins have been much more volatile.

Capital Allocation

I’m a big fan of cannibal companies, ones who use buybacks the right way to boost EPS, but this is a case of unnecessary repurchases. Share count was reduced over 50% since the 2013 peak, but what it has done in the short term was boost ROE and EPS growth.

There is no need to aggressively lower share count when earnings are not consistent and the operations are not continually growing.

Risk

The major risks I see come in three parts. First is uncertainty of industry growth, second is debt levels not lowering enough, third is a capital allocation issue of unnecessary buybacks mentioned above.

Travel trends are a major impact on the company and industry, and a black swan event like the pandemic obviously changed the entire outlook of this industry. I can’t predict exactly how the industry dynamics will look in the future, but I expect business travel to drop more than leisure/personal travel will as time goes on. Moreover, travel as an industry has become harder to predict in a post-Covid world. This brings considerable risk to the sector, so the only way to adjust to such risk is to pay a low enough price. More on that in a bit with valuation.

Next is the debt issue. Current levels still look high at first glance, but the company has a record of significant debt repayment. Over the past decade they have paid down between $10-20 billion each year. Because of this I’m not too worried, but an eye should be kept on rising debt. All figures below in billions:

Click to enlarge

Valuation

Below is the multiples comp:

Click to enlarge

CAR is trading in line with its peers, so no discount is available to us on a multiples basis. Next is the dcf model. I used 2019 EPS to conservatively assume things in the industry would normalize over time.

On an intrinsic basis the company is still overvalued, which also means that the buyback strategy isn’t as effective as it may seem at first. This stock deserves a low multiple, but it’s not low enough to be considered deep value. There’s not enough potential upside versus the risk. So this is a stock that shorter term and long term investors should avoid at the current price.

Conclusion

AVIS saw a surge in travel after the worst of the pandemic happened, but I would argue that the future is more uncertain than ever in this sector. The ROE metric is artificially high due to recent aggressive share reductions, which has also given a short term boost to EPS. There is still more risk associated with any potential upside to justify an investment on a fundamental level. When coupled with the stock being overvalued intrinsically, this is an investment to avoid for now. I don’t see a major collapse of the company likely, but it will still be a struggle for the company to even generate average returns going forward.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Avis Budget Group: Fundamental Risk For Overvalued Price appeared first on Up2info.com.

• The car rental sector seems very attractive long term (3 to 4 years).
• Avis offers generally strong fundamentals and a low PE ratio.
• Short-term risk factors don’t necessarily change the long-term bull case.

With strong fundamentals, a sound financial base and a positive outlook for the entire industry the Avis Budget Group (NASDAQ:CAR) makes a compelling case for an attractive long-term value stock.

By looking at the stock chart alone an investor might not be too thrilled with the idea of including CAR into a stock portfolio. On a year-to-date basis the stock is almost down by 19% slightly outperforming the S&P 500. From its high in March 2022 it depreciated roughly by 45%. All nine rating firms who currently cover the stock gave it a “hold” rating, as MarketWatch reported. Yet, its average 12 months price target is $217 which would mean a return of about 32%. So, is Avis an attractive investment at the current price for someone adding new stocks to a long-term portfolio or will hopes be in vain?

Let’s look at the sector first.

Bright times ahead for car rentals

As car sharing becomes more and more attractive so does renting a car. However, car sharing shouldn’t be considered as competition to car rentals but merely as yet another alternative to traditional car ownership. As published by Statista, the car rental market is expected to grow by 7.98% annually until 2027 with most of the growth happening in the United States. Also revenue of the entire sector is expected to reach more than $81 billion with an average revenue per user of more than $197. This offers us a reasonable time horizon of three to four years (while some analysts expect this trend to continue even until 2029).

Judging from my experience this growth can be partly explained by two major factors. One being the different views of Millennials and Generation Z when it comes to car ownership. Owning a car that we only use for a fraction of the day might not seem as financially attractive as renting one on occasions when we really need it. This also holds for car sharing. Therefore, we might see a more profound transformation of the entire car industry in the coming two decades although this transformation will most likely not be steady. GetJerry.com even reports that car ownership trends upwards in some parts of the U.S. (California).

The other major factor is inflation. With skyrocketing car prices consumers might find it harder to buy (or even finance) a new car. And with higher costs of living in general the desire of owning a car might fade, as reported by the UK magazine Motortrader.com. While owning a car makes a lot of sense in rural areas where public transportation is scarce or at least somewhat inconvenient, more and more “urbanites” find it more appealing to rent a car once in a while avoiding a long-term commitment to as costly luxury.

Strong Fundamentals

Looking at Avis’ balance sheet and income statements, one year does (quite unsurprisingly) stand out: 2020. Like many other car rental firms, car fleets were partly sold due to a lack of demand while prices for used cars dropped instantaneously. And yet, while 2020 was a terrible year for the entire industry, in 2022 Avis managed to grow their revenue by 26.6% compared to 2021 and by more than 28% compared to 2019. (I will simply ignore the year 2020 for now and calculate the 2022 figures with the last reported TTM numbers). In 2022 gross profit was up 48.8% compared to 2021. Net income rose by 111.9%.

Let us focus on the net profit margin next which tells us how much net income a company retains from its revenue. Avis managed to grow their net profit margin significantly during the last couple of years. In 2018 the net profit margin was as low as 1.8%, in 2019 it rose to 3.2%, in 2021 to 13.8% and finally in 2022 to 23.1%. This makes Avis an increasingly profitable business despite its negative stock performance in 2022.

We will have a look at the asset turnover next. This measure tells an investor how efficient a company uses its assets. From this perspective Avis is a pretty efficient business with a high asset turnover hovering in (or near) the 40s. In 2018, Avis had an asset turnover of 47.6% (i.e. the dollar value of their revenues was 47.6% of the dollar value of their total assets). In 2019, the asset turnover slightly decreased to 39.7%, while it rose to 41.2% in 2021 and to 46.8% in 2022.

It wouldn’t be financially sound, of course, to disregard a particular bad year as one bad year could easily end a company. So, let’s focus on the financial health of Avis next to see whether 2020 significantly affected the company’s leverage or not.

The soundness of Avis’ financial health

To focus on the soundness of Avis’ financial health I am going to look at the total-debt-to-total-assets ratio of the company to answer one utmost important question: How leveraged is the company? The higher the number, the higher the leverage.

In 2018, Avis’ total-debt-to-total-assets ratio stood at 0.98 meaning the company had almost as much total assets as total liabilities. It slightly improved to 0.97 in 2019, while it rose to 1.01 in 2021 and finally to 1.02 in 2022. So, yes, we do see a (very) slight deterioration concerning the total ratio for a number below zero indicates more assets than liabilities. However, a deterioration of this ratio from 0.98 (2019) to 1.02 (2022) might not be that surprising when considering the dramatic impact of Covid to the overall economy. This shows us that despite the fact of having a detrimental effect on net income as reported in the company’s income statement, the year 2020 did not significantly increase the company’s total ratio as it did not significantly increase the company’s leverage. Therefore, we can disregard 2020 for that matter. (When it comes to cash flow, however, Avis reported – quite unsurprisingly – the lowest cash flow from operations during the year 2020.)

The Alternative

Compared to one of its biggest rival, Hertz (HTZ), Avis seems to me to be the better alternative especially when focusing on revenue growth and net income between 2018 until 2022. While Avis could grow their revenues during that period, Hertz’ revenues are still short of their high in 2018 and 2019 (yet growing again). Moreover, Hertz’ net income was negative from 2018 throughout 2020.

Then again, Hertz might not seem so unattractive as a long-term stock when looking at the company’s total-debt-to-total-assets ratio. While it stood at 0.95 in 2018, it improved to 0.85 in 2021. And even if we calculate it for 2022 with the last reported numbers this ratio is 0.87 meaning the company has more total assets than total debt.

With a 2022 net profit margin of 19.5% (calculated with the last reported numbers as stated above), Hertz was slightly less profitable than Avis yet had a moderately better total ratio.

So, what could possibly go wrong?

The stock has currently an astonishingly low PE ratio of 2.9. Despite the fact that the company managed to increase their EPS during the three quarters, a low PE ratio often means that investors fear lower EPS in the future. Lower earnings per share are, indeed, a possibility in a not-so-mild recession. In case of a somewhat more serious recession there are several factors that could impede the car rental business.

Reduction of tourism. Should we see a reduction of tourism – as unlikely as that might seem now – we are also likely to see a reduction in car rentals. It is doubtful that this negative effect would be mitigated by more business related car rentals that are also likely to decline during a moderate recession.

Rising oil prices. It is hard to tell where the oil price might trade ten months from now as this not only depends on the war in Ukraine but also (and even more so) on the continuing re-opening of China. A fast and continuous large scale re-opening could generate a significantly higher demand and thus considerably higher energy prices. The resulting increase in gas prices would also increase the overall cost of renting a car and can also be regarded as a potentially negative effect for the industry.

Inflation. In case inflation stays high and does not decline to its pre-pandemic level, customers will have to cut their expenses in the long run, especially if wages continue to not keeping up with inflation. Again, a fast and steady re-opening of China is likely to create upward pressure for inflation.

Market risk. Despite the already low PE ratio of Avis, PE ratios tend to fall during recessions. According to Schroeders, the trailing PE ratio of the S&P 500 “generally bottoms around 12x” during recessions (including the Great Depression), while the current PE ratio of this major index is currently at 20.29. Should we face a typical recession, this would mean another drop of the S&P index by as much as 40%. Even though Avis might seem as a good investment in the long-term, market risk would potentially mean more pain for short-term investors.

Conclusion

Looking at the industry outlook in general and at Avis’ fundamentals the company seems as an interesting addendum to a long-term (3 to 4 year) stock portfolio. On the other hand, a lot of potentially negative short-term factors could hurt short-term investors looking to hold on to the stock only for six to twelve months. Yet, such negative short-term risks do not seem to change the overall 3-to-4-year outlook of this stock.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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