Avis (CAR, Financial) picked up an envious gain of close to 8.5 percent on Friday as the investors were optimistic about the prospects of the company as a result of Hertz’s (HTZ, Financial) price increase announcement. Besides the announcement that Hertz will increase the prices by 5 percent across the board starting in June, the decision to close down 200-off airport locations also created enthusiasm among Avis investors. Let us understand if these amenable industry conditions coupled with company’s strengths make it a good pick.
A glance into past numbers
In the first quarter of 2015, the company reported flat revenue year-over-year despite an increase in the rental volume across the Americas region. Thought the company met the Street expectation on earnings, the car rental giant failed to exhibit the expected growth on the topline. To be precise, the company reported net revenue of $ 1.85 billion, down 1 percent Y-o-Y, whereas its adjusted EPS came in at 17 cents per share. The management pointed out a host of factors like difficult weather, currency fluctuations, and overall macroeconomic conditions behind the flat performance in the first quarter.
While the results were flat, the pricing in both Avis and Budget brands gave some upside to the result. Though the growth in pricing stood at a modest 1 percent in both the brands in the Americas region, it was a good achievement considering the difficult weather conditions. It is significant for the investors to note that the problem of over-fleeting during the quarter was caused because of the lower utilization. Basically, the increased number of storms falling at the beginning of the quarter impacted not only the volume across the core Americas region but also exerted reasonable pressure on the pricing front.
Lackluster performance but bright prospects?
Clearly, Avis failed to deliver a commendable growth in the quarter. Owing to different reasons, the decline in volume and petty growth in pricing especially in the largest contributing region, hindered Avis’ quarterly growth. Rather than pondering over the causes, the better idea is to understand the future prospects of the car rental industry and whether Avis can leverage the recent announcements made by its foremost rival, Hertz.
As I mentioned at the outset, Hertz has decided to reduce the size of its operations in an effort to trim costs, and it has announced a reasonable increase in the prices in order to expand its margins. Though it is not yet clear if this price increase is temporary i.e. to leverage the strong demand in the summer season, it is clearly visible that Hertz wants to minimize the risks by managing its fleet size. Currently, Avis has not indicated whether it will follow this price-cut move by Hertz. However, there is a strong belief that the demand in the summer season will bring back the much needed relief to the car-rental companies. Avis’ pricing has been flexible in the past and a modest 1-2% increase in pricing (as the management expects) will definitely enable the company to leverage the excess demand. It goes without saying that Avis will have to excel in fleet size management and international pricing in order to grab a larger share of the increased pie.
Reiterated guidance
In keeping with the expected strong demand in the summer season, Avis had reiterated its guidance for the fiscal year 2015. As this Zacks report highlights, the company expects a jump of 4 percent in revenue for the year while the adjusted EBITDA is expected to come in the range of $900 - $1 billion. This implies a jump of close to 3% - 14% year-over-year.
In order to abet its international business, Avis’ strategy to grow inorganically will definitely help it in gaining ground. For instance, the company expects the rental days to increase more than 15 percent in the international segment this year because of the acquisition of Maggiore and its Scandinavian licensee. The strategy around consolidating its global business will definitely prove to be helpful to Avis on both capacity management and pricing fronts.
Final word
The car rental industry has not been the most lucrative in the past because of challenging weather conditions and mostly because the flagship companies i.e. Avis and Hertz have fallen behind in the technology revolution that has modified the other industries like aviation, hotels etc. However, in my opinion, this is the correct time to cherry-pick. Though Avis has gained recently, it is still fairly valued and considering the future prospects of the company, it is a good buy.
