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.
About This Great Player
With a market cap of $6.376 billion, 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 870,000 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 Budget Group is dedicated to being a best-in-class Customer Led, Service Driven organization, one that drives increased loyalty, revenue and profitable growth. The Company has three operating regions: North America, Europe, Middle East & Africa (EMEA) and Latin America/Asia Pacific. 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.
Tracking the Performance
On May 7, 2014, this leader in car sharing networks posted better-than-expected results for its first quarter ended March 31, 2014. For the quarter, the Company reported revenue of $1.9 billion, a 10% increase compared with the prior-year first quarter. Top and bottom lines were aided by strong contributions from recent acquisitions of Avis Europe, Zipcar, Apex and Payless. Adjusted EBITDA increased 26% to $117 million. The Company reported net income of $18 million, or $0.16 per share, excluding certain items, and GAAP net income of $4 million, or $0.03 per share. Segment performance of Avis is provided below.
From the above chart, in the North America section, it can be seen that revenue increased 13%, primarily due to the acquisitions of Zipcar and Payless, and a 4% increase in volume and 2% higher pricing, excluding Payless. Adjusted EBITDA increased 23%, primarily due to higher volume and pricing, partially offset by a 7% increase in per-unit fleet costs. Excluding the acquisitions of Zipcar and Payless, revenue grew 6% and Adjusted EBITDA increased 11%.
In the international segment, revenue increased 7%, primarily due to a 3% increase in rental days, a 1% increase in total revenue per rental day (which excludes licensee revenues and was comprised of a 7% increase in ancillary revenue per day and a 2% decline in reported pricing) and the acquisition of Zipcar. Adjusted EBITDA was unchanged primarily due to revenue growth and synergies from the integration of our European operations, offset by a $9 million negative impact from currency exchange movements.
Due to a 3% decrease in volume (truck rental fleet was 14% smaller in 2014); truck rental revenue declined 1%. Adjusted EBITDA improved by $3 million in the first quarter due to a 4% increase in pricing.
The Company repurchased approximately 1.6 million shares of its common stock at a cost of $75 million in the first quarter. As of March 31, 2014, the Company has repurchased a total of 3.2 million shares at a cost of approximately $125 million under the $200 million share repurchase program authorized in August 2013. In April 2014, the Company increased the repurchase authorization by $235 million.
Compared to 2013, Avis expects its full-year revenue will be approximately $8.4 billion to $8.6 billion, a 6% to 8% increase. In 2014, the company expects its rental days to increase 4% to 6%, 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 $215 million, a reduction of $13 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 111 to 112 million, including the effect of repurchasing $200 million to $300 million of outstanding shares in 2014. The company also estimates that its 2014 diluted earnings per share, excluding certain items, will increase approximately 14% to 34% compared to 2013, to $2.50 to $2.95, and also continues to target $1 billion or more of Adjusted EBITDA in 2015.
Two of Avis’ key strategic growth initiatives are enhancing customer experience, and expanding global footprint. To increase its profits, Avis looked at every transaction that occurred between the company and the customer, and managers used analytical technology to identify pockets of demand that could be incrementally profitable. Further, Avis took different steps to lure customers that would buy auxiliary products with big profit margins.
Recently, Priceline Group Inc. (PCLN) has launched a rental car service called Fun Rides (includes luxury sedans, muscle cars, sportsters, convertibles, and other cars) on its U.S.-focused Priceline.com website for events like weddings, high-school reunions and big-ticket vacations. Avis became one of the partners to provide those cars.
On April 22, 2014, Avis has entered into a multi-year exclusive global partnership agreement with British Airways to provide British Airways customers with access to Avis Car Rental vehicles, along with other travel benefits. To add more customers in its arena, Avis acquired its existing Budget Car & Truck Rental licensee in Edmonton, Alberta, Canada in February 2014. The investment of approximately $30 million, plus the cost of acquired fleet, will help the company to capture a larger share of Canada's domestic, international-inbound and truck rental spend. Avis also re-acquired the license rights to the Budget Car Rental brand in Portugal in February. Additionally, this leader in the car rental industry is accelerating its growth by delivering higher revenue per transaction which is shown below.
Avis faces strong competition from Hertz Global Holdings, Inc. (HTZ). Recently, Hertz announced that its internal controls for financial reporting are not showing the true picture, and the company has to restate its 2011 earnings and correct financial results for the past three years as a result of accounting errors. This made Avis to strengthen its position ahead of Hertz.
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. Avis’s strong earnings growth drives a reduction in leverage which is shown below.
Charts from company website
Additionally, 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.