Avis Budget Group (CAR, Financial), the $2.8 billion New Jersey-based rental and leasing services company, reported a (-)1.1% revenue decline to $4 billion and hefty losses of $104 million in the first half compared to $15 million losses a year earlier.
Overall operating expenses increased by 2% resulting to higher losses in the period. Under its operating expenses, Avis recorded 10.7% higher net vehicle depreciation and leasing charges to $1.1 billion and 2.25 times higher restructuring and other related charges to $45 million.
Avis also provided its fiscal year 2017 guidance figures. Among the figures provided, the company expects revenue in the range of $8.8 billion to $8.95 billion (vs. $8.66 billion in 2016), adjusted net income in the range of $205 million to $240 million (vs. $273 million in 2016) and an approximate adjusted free cash flow $350 million (vs. $472 million in 2016).
“Our second quarter results in the Americas reflected both a 4% reduction in pricing resulting from industry overfleeting and higher per-unit fleet costs due to lower used-vehicle values. Consequently, we have identified $25 million of additional savings opportunities globally, bringing our total expected savings this year to $75 million, and have lowered our full-year earnings guidance to reflect the difficult first half.
“Industry fleet levels in the Americas normalized to demand toward the end of the second quarter. This enabled us to transition to improved pricing with revenue per day up more than 1% in July. Looking forward, I am now more optimistic that the industry issues we’ve been contending with should be behind us.
“Our recently announced partnerships with both Waymo and RocketSpace are providing opportunities to pilot scalable new business models as we start to execute on our strategy to leverage our fleet management and logistics capabilities in the rapidly developing mobility space.
“I'm also excited about all of the innovative growth initiatives we've announced this year, including enabling Avis customers to transact with us through Amazon Alexa and Google Home.” –Â Larry De Shon, Avis Budget Group president and CEO
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Valuations
Avis is overvalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 43.2 times vs. the industry median of 17 times, a price-book (P/B) ratio of 19 times vs. 1.8 times and a price-sales (P/S) ratio 0.34 times vs. 1.3 times.
The company has not provided any dividend payouts in the past decade.
Average fiscal 2017 revenue and earnings-per-share estimates indicated forward multiples of 0.3 times and 13 times – collectively about 44% lower than the company’s three-year averages.
Total returns
Avis provided (-)9.24% total losses to its shareholders so far this year compared to the Standard & Poor's 500 index’s 10.99% gains.
Avis Budget Group
Founded in 1946, Avis is believed to be the first company to rent cars from airport locations (company filings). Avis expanded its geographic reach throughout the U.S. through growth in licensed and company-operated locations in the 1950s and 1960s.
Avis is a leading global provider of vehicle rental and car-sharing services, operating three of the most recognized brands in the industry through Avis, Budget and Zipcar (1).
The company is a leading vehicle rental operator in North America, Europe, Australia, New Zealand and certain other regions the company serves. In 2016, Avis generated 70.7% of its sales in the U.S.
Avis and its licensees operate the Avis and Budget brands in approximately 180 countries throughout the world. Further, Avis generally maintains a leading share of airport car rental revenue in North America, Europe, Australia and New Zealand and also operates one of the leading truck rental businesses in the U.S.
In addition, Avis is a leading rental car supplier positioned to serve the premium commercial and leisure segments of the travel industry, and Budget is a leading rental vehicle supplier focused primarily on more value-conscious segments of the industry.
On average, Avis’ rental fleet totaled approximately 600,000 vehicles, and the company has completed more than 39 million vehicle rental transactions worldwide in 2016.
Avis generates approximately 70% of its vehicle rental revenue from on-airport locations and approximately 30% of its revenue from off-airport locations.
The company also licenses the use of the Avis and Budget trademarks to licensees in areas in which the company does not operate directly.
Avis’ Zipcar brand is the world’s leading car-sharing company, with more than 1 million members in the U.S., Canada and Europe. The company also operates Budget Truck, one of the leading truck rental businesses in the U.S., with a fleet of an estimated 22,000 vehicles that operates through a network of about 1,000 dealer-operated and 480 company-operated locations throughout the continental U.S.
Avis also owns Payless, a car rental brand that operates in the deep-value segment of the industry; Apex, which is a leading deep-value car rental brand in New Zealand and Australia; Maggiore, a leading vehicle rental brand in Italy; and France Cars, which operates one of the largest light commercial vehicle fleets in France. Avis also has investments in certain of its Avis and Budget licensees outside of the U.S., including joint ventures in India and China.
Avis categorized its operations into two reporting segments: Americas and International.
Americas
Americas provides and licenses the company’s brands to third parties for vehicle rentals and ancillary products and services in North America, South America, Central America and the Caribbean and operates the company’s car-sharing business in certain of these markets.
In the first half, revenue in the Americas fell by (-)2.6% year over year to $2.88 billion and generated an adjusted EBITDA margin of 2.6% compared to 7.6% a year earlier.
According to filings, Avis had lower company-defined profit metric due to lower revenues and an 8% increase in per-unit fleet costs. Per-unit fleet costs represent vehicle depreciation, lease charges and gain or loss on vehicle sales divided by average rental fleet and exclude Avis’ U.S. truck rental operations.
International
International provides and licenses Avis’ brands to third parties for vehicle rentals and ancillary products and services in Europe, the Middle East, Africa, Asia, Australia and New Zealand and operates Avis’ car-sharing business in certain of these markets.
In the first half, international revenue grew 2.7% year over year to $1.2 billion (29% of sales) and had adjusted margins of 5.5% compared to 5% a year earlier.
Sales and profits
In the past three years, Avis registered revenue growth average of 2.94%, average profit rise of 116.8%,and profit margin average of 2.8%.
Cash, debt and book value
As of June, Avis had $776 million in cash and cash equivalents and $14.93 billion in debt with debt-equity ratio of 100.9 times compared to 43.3 times a year earlier. Overall debt increased $57.6 million year over year while equity declined by $191 million.
Of Avis’ $20.8 billion assets 9.2%Â were identified as goodwill and intangibles while book value has fallen (-)56% year over year to $148 million.
Cash flow
In the first half, Avis’ cash flow from operations rose 5.6% year over year to $1.14 billion brought by higher cash flows from its accounts payable and other current liabilities despite higher losses in the period.
Capital expenditures including allotted vehicle program expenditures were $8.12 billion leaving Avis with (-)$7.06 billion in free cash outflows compared to (-)$7.51 billion a year earlier. Avis, nonetheless, allocated $109 million for share repurchases and raised $2.25 billion in debt net repayments and other financing activities.
The cash flow summary
In the past three years, Avis allocated $36.84 billion in capital expenditures, raised $936 million in debt net repayments and other financing activities, accumulative free cash outflows of $29.04 billion, yet still provided $1.08 billion in share repurchases.
Conclusion
Avis’ recent report indicated higher expenses related to its net vehicle depreciation and leasing charges resulting to wider losses in the period. Nonetheless, the company expects its succeeding quarters to deliver better results. Earnings estimates by analysts also indicated better profitability in this fiscal year ending in December.
Nonetheless, Avis has a leveraged balance sheet that may deter most conservative investors while having failed to generate any positive free cash flow in recent years.
Analysts have an average overweight recommendation on Avis with a target price of $36.36 per share vs. $33.29 at the time of writing. Despite the ongoing promising agreements with tech companies, Avis is a pass.
Notes
- Company filings
Mergers and acquisitions
HFS Inc. acquired Avis in 1996 and merged with Avis’ predecessor company in 1997, with the combined entity being renamed Cendant Corp.. The company is headquartered in Parsippany, New Jersey.
In 2002, Cendant acquired the Budget brand and Budget vehicle rental operations in North America, Australia and New Zealand. Budget was founded in 1958 as a car rental company for the value-conscious vehicle rental customer and grew its business rapidly during the 1960s, expanding its rental car offerings throughout North America and significantly expanding its Budget truck rental business in the 1990s.
In 2006, Cendant completed the sales and spinoffs of several significant subsidiaries and changed its name to Avis Budget Group Inc.
In 2011, Avis expanded its international operations with the acquisition of Avis Europe, which was previously an independently owned licensee operating the Avis and Budget brands in Europe, the Middle East and Africa and the Avis brand in Asia.
Upon the completion of the acquisition of Avis Europe, the Avis and Budget brands were globally reunited under a single company, making Avis Budget Group one of the largest vehicle rental companies in the world.
In 2013, Avis acquired Zipcar, the world’s leading car-sharing company, to further increase its growth potential and its ability to better serve a greater variety of its customers’ mobility needs.
In 2012 and 2013, the company acquired Apex and Payless brands, which allowed it to expand its presence in the deep-value segment of the car rental industry.
In 2014, Avis also acquired its long-standing Budget licensee for Southern California and Las Vegas, which further expanded its company-operated locations in the U.S.
In 2015, the company acquired the operations of its former Avis and Budget licensees in Brazil, Norway, Sweden and Denmark; its Avis licensee in Poland; and Maggiore, a leading provider of vehicle rental services in Italy.
In 2016, Avis acquired France Cars, a privately held vehicle rental company based in France, to significantly expand its presence in the French market.
Disclosure: I do not have shares in the company mentioned.
