The Long Case for Avis Budget

Includes: CAR, DTG
by: Brian Harper, CFA

Avis Budget Group (NASDAQ:CAR), the discarded remnants of conglomerate Cendant, is being given away at current levels. Why, you ask?

First, the company is by far the least sexy of the four former Cendant businesses: rental cars and trucks. And the co is a small cap. With a $1.8 billion market cap it is the smallest piece of the Cendant pie and the most likely to be sold indiscriminately. They did a 1 for 10 reverse after the breakup... so many folks ended up with 100 shares or less. Given 100 shares or less of a company you didn't originally intend to own, most people decide to sell rather than give it any more thought.

First, let's do the simple comparison: Dollar/Thrifty (NYSE:DTG) is selling at 67% of sales and Avis/Budget is selling at 31% of sales. The companies historically have been similar in terms of profitability -- for the first 6 months of 2005 Dollar/Thrifty had a pre-tax margin of 6.2% and Avis/Budget of 6%.

Since then CAR's margins have slipped and DTG's have risen. This is because Avis/Budget uses newer cars and has higher depreciation charges, but this is offset by higher rates and thus lower other expenses as a percentage of revenue. CAR also has about 20% more net debt than Dollar relative to revenue.

Besides the spin-off related issues, others are that fleet costs have gone up a lot due to the sorry state of the U.S. auto industry. This has naturally hurt Avis/Budget a lot more as they replace their fleet more often. At present, CAR's margins are depressed.

But rental car rates are on the rise, which will benefit CAR especially. At a 6% long-term pre-tax margin assumption, and $6 billion in revenue (2007 estimate), CAR is a double from the current price of $18.

And as with any spin-off, a degree of cost cutting can be expected, which could provide upside to the margin assumption.

Disclosure: Author is long CAR

CAR 1-yr chart: