In response to a question from a Member of his Inner Circle, Pat McKeough examines one of the leading car-rental companies in the world. The Avis Budget Group has more than half a million vehicles in its worldwide fleet and its profits are up. While that would appear to make the company a promising growth stock, it faces major challenges. Pat looks at competition from low-cost online rentals and the surging popularity of ride-sharing services like Uber and Lyft and the ways in which they undermine traditional car rentals.
Q:Pat: Could I get your views on Avis Budget Group? Thank you.
A: Avis Budget Group Inc. (symbol CAR on Nasdaq; www.avisbudgetgroup.com) rents cars and trucks under the Avis and Budget banners at more than 10,000 locations in 175 countries. It also owns Zipcar, a leading vehicle-sharing service with 950,000 members. In all, the company has roughly 540,000 vehicles in its fleet.
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The Avis brand supplies 65% of total revenue, followed by Budget (30%) and Zipcar (5%). About 70% of Avis Budget’s revenue comes from rentals at airports.
In the three months ended September 30, 2015, the company’s revenue rose 1.4%, to $2.58 billion from $2.54 billion a year earlier. Without the negative impact of the high U.S. dollar, which hurts the contribution from its foreign operations, revenue gained 8%.
The company’s total number of rental days (or the days a vehicle was rented) rose 9.6%. However, unfavourable exchange rates cut average revenue per day by 7.7%.
Earnings fell 1.4%, to $206 million from $209 million. Avis spent $161 million on share buybacks during the quarter. Due to fewer shares outstanding, per-share profits improved 3.7%, to $1.98 from $1.91.
Avis Budget ended the quarter with cash of $585 million, which will help pay for its plan to buy back at least $300 million worth of its shares in 2016. However, its long-term debt of $3.5 billion is a very high 90% of its market cap.
The company recently agreed to pay $25 million for its Avis licensee in Poland, which will give it greater control over the brand as it expands in Europe. The new business will add $20 million to Avis Budget’s yearly revenue.
Growth stocks: Uber and Lyft likely to cut into car-rental demand
The company’s Avis and Budget are among the world’s top car-rental brands. For all of 2015, Avis Budget Group expects to earn $3.10 to $3.25 a share, up about 7% from 2014. The stock trades at a low 10.6 times the midpoint of that range.
However, the car-rental business has become far more competitive because of online marketing of low-cost cars. In addition, credit-card guarantees of damage claims have taken a lot of the risk out of renting cars from unknown or start-up companies.
To top it off, increasingly popular ride-sharing services like Uber and Lyft are likely to cut into rental car demand, especially for business travellers. Ride-sharing services are cheaper than traditional taxi and limo services, more convenient and reliable, and users can summon them on short notice. Unlike rental car customers, ride-sharing clients don’t have to worry about parking, navigation, or vehicle fueling or breakdowns.
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