Avis Budget Racing To New Highs

Aug.13.14 | About: Avis Budget (CAR)

Summary

Avis Budget reported stronger than expected revenues last week.

The revenue growth is attributed to increased pricing power.

Strategic acquisitions and stock buybacks could continue to fuel the company's share price higher.

Avis Budget Group (NASDAQ:CAR) could prove undervalued at current levels based off of last week's impressive earnings announcement. The leading global car rental company increased net revenue 10% year over year to $2,194 million in the second quarter, surpassing Wall Street estimates. The strong results were aided by strong volume growth and improved pricing for both leisure and commercial travels in North America, as well as the company's focus on speeding up growth in its most profitable channels.

"I'm probably more enthusiastic about our business than I've ever been," Ronald Nelson, Avis Budget's chief executive, said during the conference call with analysts. "And one of the reasons is the meaningful change in pricing that we've now seen play out over the past six quarters."

Consolidation has improved the financial side of the business at Avis Budget. In July, Avis Budget spent $50 million for Payless Car Rental to improve its offerings in the "deep-value" segment of the rental market. This came a month after Avis acquired Zipcar for $500 million, further diversifying into the car-sharing business. The consolidation has led to price increases in North America by 5% for Avis Budget in the same period last year. The company also raised its full-year sales and income targets.

Meanwhile, the company's effort to continue share repurchases has driven the stock price close to 60% higher this year. Throughout the second quarter, Avis Budget bought back over 1.3 million shares for $75 million under its $200 million share repurchase authorization approved in August 2013. Although this marks the completion of the program, with about 4.6 million shares repurchased since August 2013, strong free cash flow generation could lead to a similar program being put into place at a later date.

Turning to the future, the company raised its fiscal 2014 projections for revenue, adjusted EBITDA and earnings per share. The company now projects fiscal 2014 revenues in the range of $8.6-$8.7 billion, an increase of 8%-10% from the 2013 level. Further, the company raised the expected rental days forecast for its North America division from 4%-6% to 5%-7%. Lastly, North American rental prices are expected to rise 2% for the year.

The company holds an attractive position within the rental car sector. It is moving deeper into both the budget and car sharing space, adapting to consumer demand. If Avis Budget is capable of continuing to navigate its way through the industry with pricing power and strategic acquisitions, the company's share price could maintain its trend higher from a breakout in 2012.

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