Solid Value in Steve Cohen's Avis Budget

Stock is down 60% in the last 52 weeks, making a nice buying opportunity

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Feb 26, 2016
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Despite being only one of 666 (ominous) holdings in Steven Cohen’s family office portfolio, the low price multiple, and recent gap down in market value has made the company’s stock possibly worth buying under $24.

Just a year ago, the stock was trading in the low 60s, having turned the corner financially with many analysts estimating earnings to reach $3.60 by the end of next year. However, just a small multiple expansion to 10x from 8x would mean 50% gains for investors.

Company

Avis Budget Group Inc. (CAR, Financial) is a leading global provider of vehicle rental services, both through its Avis and Budget brands, through more than 10,000 rental locations in approximately 175 countries around the world, and with its Zipcar brand – an intelligent acquisition to get into the ride-sharing market.

Financially, in the last five years, the company has swung to a nice profit, going from losing $29 million on $5.9 billion in sales during 2011 to earning $313 million on $8.5 billion in sales last year. The problem is that the company added an extra $3 billion in long-term debt to do it. Again, if you are investing in just a few positions, chances are you don’t want a company ladened with this level of debt to income. However, from a short-term perspective, Avis could get the bounce.

Competition

Avis expects full-year 2016 revenue to be in the range of $8.7 billion to $8.85 billion with 2% to 4% growth. Soft demand in the rental industry has hurt everyone in the industry. Hertz (HTZ, Financial) has also seen its stock plummet in the last year, down 65% over the last 52 weeks.

The real competitor to the group is a fundamental change in habits of consumers. Air travel is affordable and with Uber and Lyft entering more markets, ride sharing is en vogue. As a culture, the majority of Americans live in cities now and driving around, paying for parking, finding parking, etc., is a pain that Uber/Lyft alleviates. That said, business travel and commuter/repair-related rentals will continue to be a driving part of the model.

Catalysts

Avis' biggest shareholder, SRS Investments, just placed analyst Brian Choi on the board. SRS will also be "entitled to recommend an independent director not affiliated with SRS" join the board, subject to the board's approval.

Avis has added $300 million to its buyback authorization; that's good for repurchasing 12% of shares at current levels. Avis had $258 million left on its authorization at the end of Q3, and it continued to buy back shares in Q4 and Q1. This commitment would bring the current shares down below 90 million, putting the EPS closer to $4 per share.

Avis recently announced it had become the exclusive car rental provider for low-cost passenger airline JetBlue (JBLU, Financial). The partnership enables Avis to promote its brands, products and services as well as money-saving offers directly to JetBlue customers and TrueBlue members.

Several big analysts still have high ratings for Avis. Credit Suisse rates the stock Outperform with a $38 price target stating that "while weaker commercial volume trends have been the norm" for the past few quarters, the outlook seems a bit weak even taking that into account. Deutsche Bank rates the stock a Buy with a $48 price target and said, "There is little visibility into how the demand picture will play out over the seasonally significant summer months." Barclays maintains an equal weighting target of $35 and had this to say: "With soft margins, unclear what drives earnings growth. Share buybacks are likely to support EPS growth. Yet with investment expense to recur over the next few years, the case for margin expansion is limited."

Gurus Cohen and Larry Robbins (Trades, Portfolio) have average cost basis over $50 per share, owning 1,115,300 (1% outstanding) and 9,393,116 (9.3% outstanding) shares respectively. The majority of the world’s top money managers rarely place more than 2% of their portfolios in any one position. It’s just as prudent to take the same philosophy for your own investment in Avis, if you decide to make one.

Disclosure: I do not have a position in Avis or Hertz.