The stock has fluctuated wildly since 2022, trading above $300 a share and as low as $138. Now with it settling in just above $200 per share, Avis Budget Group Inc. (CAR, Financial) looks like a bargain.
Avis used to “try harder” as the number two player in the car rental space. Then it merged with Budget and today has pulled ahead of former industry leader Hertz (HTZ, Financial) by nearly $3 billion on the top line.
Avis Budget is (another) story stock
Avis Budget is an American public company that provides rental and leasing services.
Avis started in 1946 and 12 years later, in 1958, Budget formed. Together, it is the parent company of several brands, including Avis Car Rental, Budget Rent a Car, Budget Truck Rental, Payless Car Rental and Zipcar. The company also operates several smaller regional brands, including ACL Hire, Apex Car Rentals, AmicoBlue, France Cars, Maggiore Group, MoriniRent, TurisCar and TurisPrime. It holds a 26% market share in the U.S., making it one of the three big rental car holding companies along with Hertz and Enterprise​.
Business model
The company acquires a fleet of vehicles from various manufacturers at negotiated prices. They maintain a diverse fleet, including everything from economy cars to luxury vehicles and trucks, to cater to different customer needs. The cost of acquiring and maintaining these vehicles is a significant operating expense.
The primary revenue source comes from renting out these vehicles to individuals and businesses. Customers pay a daily, weekly or monthly fee to rent a vehicle. The prices can vary based on the type of vehicle, rental duration, location and season. Long-term leases are another source of income.
On top of the basic rental fee, Avis Budget Group also offers additional services for an extra charge. These can include insurance waivers, GPS navigation systems, car seats, Wi-Fi access, roadside assistance and fuel service options. Late return fees, one-way rental fees and airport concession recovery fees also contribute to the company's revenue.
Once the rental vehicles reach a certain age or mileage, they are typically sold in the used car market. This helps the company recover a portion of the initial vehicle acquisition cost and manage the size and age of its fleet. The profits from these sales can vary depending on the condition of the vehicle and the state of the used car market.
The company also has partnership agreements with various airlines, hotels and other travel-related companies, which offer deals and provide a steady stream of renters to Avis. The company also runs loyalty programs that encourage repeat business by offering perks and rewards to frequent users.
It also owns car-sharing service Zipcar, bought for around $500 million, an acquisition that could pay off if consumer demand shifts. For now, Zipcar is the top name in a very small niche.
Competitive advantages
Avis Budget Group has several competitive advantages.
First, with approximately 11,000 locations worldwide, Avis Budget has a significant global footprint. This broad geographical coverage allows the company to serve customers in many different markets, including both densely populated urban areas and smaller, rural locations.
It also offers a diverse range of offerings, each targeting different segments of the market. This includes Avis, which is positioned as a premium brand; Budget, which targets value-conscious consumers; Payless, which is even more budget-focused; and Zipcar, a car-sharing service that appeals to urban dwellers and college students. This diversity allows the company to cater to a wide range of customer needs and preferences.
As noted previously, Avis Budget has formed strategic partnerships with airlines, hotels, and other travel-related companies. These partnerships often involve integrated booking systems that make it easy for customers to rent a car when they book a flight or hotel, providing a steady stream of business. Also, the loyalty programs, such as Avis Preferred and Budget Fastbreak, encourage repeat business by offering benefits like free rental days, priority service and free vehicle upgrades.
It is almost impossible to break into this industry. Managing a large fleet of rental vehicles is expensive, complex, involving challenges like vehicle acquisition and disposal, maintenance and logistics. Avis Budget's long history in the industry and significant scale give it expertise in these areas, which may be its largest competitive advantage.
A few caveats
There are several trends and technology disruptors emerging that could impact the market share of traditional car rental companies like Avis Budget.
Mobility as a service is a model that integrates various forms of transportations services into a single service. This means that services like public transit, ride-hailing and bike sharing are combined into one marketplace. This trend is being driven by customer expectations for multi-mobility and sustainable options. It also includes the potential for direct-to-consumer rentals by the automakers. In this case, Zipcar could be clutch.
Perhaps the biggest real threat is autonomous vehicles. With the rise of artificial intelligence and technological advances in autonomous vehicle fleets, vehicles like the Zoox or a driverless Uber are a reality. This, coupled with decreased consumer demand for vehicle ownership, leads to a potential shift toward shared use mobility models. That could be great for Avis Budget long term, or it could put it out of business.
The bottom line
While it is impossible to predict the future with certainty, especially with artificial intelligence reshaping every industry, the rental car business is likely to be around for some time. Some people will always want to have their own vehicle instead of being carried around by an autonomous car. That alone will keep these companies in business; however, will people travel as much for work? Or rather, will enough people travel for work?
Avis Budget Group is one of the largest car rental companies in the world, holding a significant market share. This strong position provides a competitive advantage that can help the company weather various market conditions. The car rental model is likely to undergo significant changes in the coming years due to trends like mobility as a service, autonomous vehicles and the shift to more sustainable transportation options. How well Avis Budget Group adapts to these trends will be critical to its future success.
It is not an easy picture to see 20 years out even if Avis Budget has been demonstrating remarkable performance, posting record-breaking revenue, net income and adjusted Ebitda for consecutive years.
This success can be attributed to persistent consumer demand in both domestic and international markets, along with a favorable pricing environment. Investing on the potential that demand continues or Avis can pivot with the times is a critical question in analysis. Despite these positive trends, the company's earnings momentum is projected to slow down considerably in 2023. The impacts of inflation on spending is a growing concern.
That said, gross margins growing from of 29% in 2013 to 50% in 2022 demonstrate how well the company has done at becoming more efficient on the cost of revenue side. Further down the income statement, the more impressive stat is how Avis Budget has been able to stabilize operating expenses. While revenue grew 51% from $7.9 billion in 2013 to north of $12 billion in 2022, total operating expenses only increased by 30% from $1.3 billion to $1.7 billion. Over the same period, the company decreased the number of total shares outstanding by over 60% from 106.9 million down to 39.8 million. It continues to repurchase stock, further boosting shareholder value.
More importantly, earnings per share estimates are for 2023, 2024 and 2025, which add up to nearly $91, nearly 45% of the current price. Again, the company’s debt may scare plenty of investors. I do not disagree. Yet, while the long-term debt has crept up from $3.3 billion to $4.6 billion, the company generates around $4.3 billion in operating cash flow, which makes the debt number less of an issue. The interest expense is approaching $800 million, which is not something to ignore. I just think it is manageable. If people are renting cars in five, 10 and 20 years, Avis Budget will be one of the leaders in a more valuable industry.
