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Avis: May Drive Investors Towards It

March 11, 2014 | About:
abirk

abirk

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Car sharing is a very common phenomenon in the U.S. Gone are those days when the auto rental industry was mostly limited to tourists traveling out of their home cities, needing a vehicle to travel around the new city. Now, this auto rental industry is getting bigger as firms are beginning to challenge the institution of individual car ownership. Cool technology followed by a member-driven user experience and an amazing team of hands-on car sharing enthusiasts made Avis Budget Group Inc. (CAR) the world’s leading car sharing network.

This Parsippany, New Jersey-based company operates two brands in the global vehicle rental industry through Avis and Budget, which have more than 10,000 rental locations in approximately 175 countries around the world, and through its Zipcar brand (acquired on March 14, 2013), which is the world's leading car sharing network, with more than 860,000 members. Avis is a rental car supplier positioned to serve the commercial and leisure segments of the travel industry, and Budget is a rental car supplier focused primarily on more value-conscious segments of the industry. Avis operates most of its car rental offices in North America, Europe and Australia directly, and operates primarily through licensees in other parts of the world. The company has approximately 29,000 employees. On Oct. 3, 2011, the company acquired Avis Europe Plc, followed by Payless Car Rental in July 2013.

Tracking the Performance

On Feb. 19, 2014, this leader in car sharing networks posted better-than-expected fourth-quarter and fiscal 2013 results. For the quarter, Avis Budget’s net revenue increased 9% to $1.8 billion. Top and bottom lines were aided by strong contributions from recent acquisitions, including Zipcar and Payless Car Rental. Excluding certain items, the company’s adjusted EBITDA increased 46% to $114 million, and diluted earnings per share were $0.15, on a GAAP net loss of $28 million. Avis’ full-year diluted earnings per share were $2.20, excluding certain items, on GAAP net income of $16 million. The company has posted positive surprises in four of the last five quarters, and its long-term EPS growth rate is 14.9%, above the peer group average of 14.3%. Segment performance of Avis is provided below.

From the above chart, in the North America section, it can be seen that revenue increased 11%, primarily due to the acquisition of Zipcar and a 6% increase in volume. Excluding the acquisitions of Zipcar and Payless, revenue grew 2% and Adjusted EBITDA increased 34%. Due to higher revenue and lower marketing costs, adjusted EBITDA increased 55%.

In the international segment, revenue increased 7%, primarily due to a 6% increase in rental days, and a 1% increase in total revenue per rental day (which excludes licensee revenues and was comprised of a 13% increase in ancillary revenue per day and a 2% decline in reported pricing). Adjusted EBITDA increased 21%, primarily due to revenue growth and synergies from the integration of our European operations.

Due to a 5% decrease in volume (truck rental fleet was 14% smaller in 2013), truck rental revenue declined 2%. Excluding restructuring costs related to the company’s previously announced initiative to reposition this business, adjusted EBITDA more than doubled in the fourth quarter to $5 million.

During the fourth quarter, the company bought back 720,000 shares for $26 million under its $200 million authorization approved in August 2013. Full-year share buybacks totaled 1.6 million shares for an average of $50 million.

A chart has been provided below to show Avis’ joint ventures’ 2013 revenue.

Positive Outlook

Compared to 2013, Avis expects its full-year revenue will be approximately $8.3 billion to $8.5 billion, a 5% to 7% increase. In 2014, the company expects its rental days to increase 3% to 5%, and pricing to increase approximately 1% in its North America segment. The company’s adjusted EBITDA will increase 7% to 17%, to approximately $825 million to $900 million. Total company fleet costs are expected to be $295 to $305 per unit per month in 2014, an increase of approximately 2% to 5% compared to 2013.

Further, interest expense related to corporate debt will be approximately $220 million, a reduction of $8 million compared to 2013. Avis expects that its effective tax rate in 2014 will be approximately 38%, excluding certain items, and its diluted share count will be approximately 114 million, including the effect of completing the remainder of the company's existing $200 million share repurchase authorization in 2014.

Two of Avis’ key strategic growth initiatives are enhancing customer experience, and expanding global footprint. Mobile applications enhance the customer experience, and also generate higher than average revenue per day. Therefore, on March 5, 2014, Avis has launched new mobile applications for customers of Avis Car Rental and Budget Car Rental. The new apps provide travelers with an enhanced user experience, greater transparency and mobile access to the most popular ancillary products and services offered by Avis and Budget, including Loss Damage Waiver protection, a Fuel Service Option, Global Positioning System (GPS) device rentals and various insurance coverage options. On Feb. 27, 2014, Avis has agreed to acquire its existing Budget Car & Truck Rental licensee in Edmonton, Alberta, Canada, comprising 26 rental locations in seven cities in total.

To add more customers in its arena, Avis partnered with Silver Airways, a U.S.-owned and operated airline with nearly 200 daily scheduled flights on Feb. 6, 2014. Further, the company has announced that Avis Car Rental and Budget Car Rental customers can now purchase mobile phone chargers at participating locations across the U.S. as a convenience to enable them to stay connected throughout their travels.

On Jan. 15, 2014, Avis has been named "Transportation Partner of the Year" by Ensemble Travel® Group members in the United States. Avis Budget Group was also honored with Ensemble Travel's 2013 Outstanding Agency Support Award.

Playing Strategically

Avis has generated strong cash flow of $460 million.

Deployment of this strong cash flow has been illustrated in the chart below.

Avis expects roughly $1 billion of free cash flow by 2015.

Company Growth

Avis has captured highly profitable cross border demand. Since 2011, its budget volume has more than tripled. Avis is also driving profitability through growth in ancillary products. Further, the company has significant profit margin expansion. All these are given in the chart below.

Further, Avis’ strong earnings growth drives a reduction in leverage.

On a Concluding Note

The car rental industry is expected to experience significant growth in the medium to long term. Avis is well positioned to capitalize on these favorable trends in the industry. In addition, Avis had a successful 2013 despite higher fleet costs.

Charts from company website

The company’s enhancing customer experience, expanding global footprint and current operating services will make it continue to grow and generate incredible revenue in the long run.


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