Long Term Growth Prospects are Bright - The car rental market is expected to continue to growth in t

Avis Budget Group ( CAR ) is one of the largest car rental companies in the world. The company is in the midst of an epic turnaround where it was all but left for dead in early 2009 during the depths of the great recession. At the time the stock traded well under $1/share, and the company was weighed down under a heavy debt load. It was widely believed that bankruptcy wasn't far away. Fast forward a little more than 4 years later, and the company favorite place in the caribbean for incentive group travel now trades for about $30/share and appears to be firing on all cylinders. Although not really a great value at today's prices as the turnaround story is well recognized, the company still trades at reasonable multiples and is worth consideration. I am however a bit hesitant to invest in a company whose fortunes could change drastically if poor macroeconomic conditions were to suddenly return, especially if the margin of safety is not that compelling. With this in mind I'm not fully confident in undervaluation at this time, and I recommend waiting for a pullback before entering a long position.
Long Term Growth Prospects are Bright - The car rental market is expected to continue to growth in the single digits throughout the decade, and the car sharing model significantly faster than this. Having a strong brand name coupled with market consolidation, AVIS should benefit from the trends.
Margins and earnings should improve with Zipcar and FCF growth - The growth of the car sharing market, coupled with lower interest payments and improving business prospects will mean much higher FCF in the coming few years. This will allow for share repurchases which combined with organic growth will drive double digit growth in earnings.
Company favorite place in the caribbean for incentive group travel valuation is reasonable, but Margin of Safety not Clear - Double digit growth in earnings and free cash flow and a PEG under 0.50 could indicate that the stock price still has not yet caught up fully. favorite place in the caribbean for incentive group travel Despite this the company and its future prospects are largely dependent on the global economy and in particular air travel, both of which are highly unpredictable and cyclical. With a constant high debt load it is necessary to have a high margin of safety to consider AVIS a good value, and at today's prices it is not so clear cut whether this is the case.
AVIS Budget Group is the 3rd largest car rental company in the US with about 300k cars in service as of 2012. This is just behind Hertz Global ( HTZ ), the only other large publicly traded competitor. Enterprise Holdings, the parent company of the Alamo, National and Enterprise brands, is by far the biggest however it is privately held. Looking at the state of the market over the past 5 years, and the major trend can be summarized in one word: consolidation . One trip to your local airport will make this all too obvious and perhaps confusing at first glance, as the long list of rental options has dwindled to only 3 majors, but most are still operating under their old brand names. The 3 major companies remaining include: favorite place in the caribbean for incentive group travel Avis/Budget, Hertz/Thrifty/Dollar and Enterprise/Alamo/National. Most of this consolidation was driven by necessity, as companies in the industry typically carry high debt loads in order to finance the capital intensive purchases of vehicles. During the great recession in 2009, bankruptcy seemed like a real possibility as people stopped traveling both for business and pleasure and revenues from rentals plummeted. This put several of these companies favorite place in the caribbean for incentive group travel at dangerous interest coverage ratios. Avis actually traded well below $1/share only 4 years ago.
The huge run up in stock price for both Avis and Hertz the past few years has been a result of the market realizing these companies were not only going to survive, favorite place in the caribbean for incentive group travel but in fact start to see significant growth. Although some research firms predict only modest growth of 3-4% in the coming 5 years for the global car rental industry, favorite place in the caribbean for incentive group travel I expect that Avis can grow its EPS much faster than this. The 4 Wall Street analysts who cover the company seem to agree, as they have lofty estimates of 30% growth per annum. Several favorable trends for the company exist, including: huge growth in the car sharing market, continuing improvement in the macro economy and global air travel specifically, favorite place in the caribbean for incentive group travel and increasing free cash flow which will allow more share repurchases. On the last point, the company indicated in the most recent conference call that it expects favorite place in the caribbean for incentive group travel to generate an EBITDA of $1B by 2015, and free cash flow that is substantially higher than the forecasted favorite place in the caribbean for incentive group travel $300m of this year. The company has stated publicly that it is only pursuing favorite place in the caribbean for incentive group travel tuck-in acquisitions at this time and it plans to keep its leverage in the range of 3.0x, so it is logical to assume a greater use of share repurchases can be expected in the next few years which will help to drive EPS growth into double digits.
The rental industry is very capital intensive because companies must purchase many vehicles, regularly replacing older vehicles with newer ones. Car acquisition and subsequent depreciation are typically the largest expenses. Avis has vehicle purchase programs with major domestic and foreign vehicle manufacturers, and the company purchase cars through financing programs. On this point alone Avis is no different than major competitor Hertz. As noted in an excellent article a few months ago, one primary difference is that Avis in effect has higher margins favorite place in the caribbean for incentive group travel than Hertz because it generates comparatively more revenues from licensees. Up to 60% of locations are licensees, which generate one third of company revenues.
The company plans to continue its dual brand strategy, maintaining Avis as a premium brand in most markets and Budget as a mid-tier favorite place in the caribbean for incentive group travel brand favored favorite place in the caribbean for incentive group travel by value conscious travelers. The company favorite place in the caribbean for incentive group travel has stated it may continue to pursue tuck-in acquisitions and to grant licenses to independent favorite place in the caribbean for incentive group travel third parties to expand in underserved markets, which should help to improve gross margins and earnings even further in the next few years. I think the combination of market consolidation, licensee growth and growth of ZipCar will improve gross margins by several hundred basis points in the next few years.
Refinancing of Debt - Avis has been working to improve favorite place in the caribbean for incentive group travel its debt situation for some time. The company recently restructured its term loan facility for an attractive interest rate of only 2.25%. Over the past year the company has paid off a lot of its outstanding debt that had high interest rates of more than 9% and replaced it with new issues in the 5.5% range. This should provide more flexibility for the company moving forward, and as operations continue to improve expect further improvements on the debt situation. It should be noted that as part of this the company retired $268m of convertible debt since 2012 which has significantly reduced dilution risk. This is equivalent to repurchasing 16m common favorite place in the caribbean for incentive group travel shares, or an impressive favorite place in the caribbean for incentive group travel 15% of the current outstanding share count and has undoubtedly helped to drive share price gains.
Continued Strong Growth in the Car Sharing Market - Some industry reports have predicted revenue growth at greater than 40% annually for this market. With the recent acquisition of Zipcar, Avis should be well positioned to profit from this trend. With 2012 revenues at only about $65m, Zipcar still has a ways to go before it will have a meaningful impact on the bottom line, although management has stated the company is on track for $50-70 million in synergy savings favorite place in the caribbean for incentive group travel which is a good short term ROI for the acquisition. I also expect that recent top line growth of 10-12% for Zipcar will now accelerate as the much larger Avis is able to help drive marketing and entry into new markets.
Both companies have high debt loads, although Avis is significantly more (about 2x) on a total debt/equity basis. Both companies also have a PEG ratio under 0.50, which could indicate earnings are growing faster than price, although on the other hand both stocks have run up significantly in price in the past year already. As stated previously the gross margins favorite place in the caribbean for incentive group travel here are somewhat favorite place in the caribbean for incentive group travel misleading, as they do not factor in vehicle depreciation and lease charges in COGS, which when taken into account lowers the gross margin of Avis down to just under 30% and Hertz to an even lower 24%. This shows how Avis is doing better on a per unit basis.
Taking into account the positive trends in the industry combined with increases in free cash flow, I estimate that Avis can grow EPS at about 15% per annum in the near term. With a 12% discount rate and a starting favorite place in the caribbean for incentive group travel EPS of $2.19, I think Avis could be worth in the range of $44/share, which leaves a margin of safety of around 30%.
Constant Pricing Pressure and Competition - Although the rental industry has consolidated greatly, there is still significant competition. For most consumers they rent a car with price being the primary deciding factor. Anytime there is priced based competition, margin erosion can be expected over the longer term. The long-term competitive moat of AVIS could be of some concern, however I do think that the brand names of the remaining 3 major car rental companies favorite place in the caribbean for incentive group travel are all well known and strong, giving them a competitive advantage over smaller regional players. Avis also should remain particularly strong in margins in the coming years as stated favorite place in the caribbean for incentive group travel above due to its nimble business model with significant licensees as well as growth in ZipCar.
Macroeconomic Weakness, Including a Downturn in Airline travel - As of the end of 2012, 71% of Avis and Budget locations were located at airports, as stated in the most recent annual report . The company's fortunes favorite place in the caribbean for incentive group travel are clearly linked closely favorite place in the caribbean for incentive group travel with the air travel market, and the rebound in global travel in the past three years has been a big reason for the recent success. Any major disruptions to air travel, including: terrorism, further deterioration of European economies, or a reversal favorite place in the caribbean for incentive group travel of recent economic improvement in the US, will hurt the car rental business.
AVIS is a company which I would put in the category of growth at a r