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Mayank Rasu
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I am an independent investor with a passion for value investing. My interests include researching small/mid cap companies and hounding out inefficiencies in the market. I am a firm believer of disciplined investing and I manage my own money. I have a fairly low risk appetite and before making an... More
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  • Avis Budget : Closer Look At The Earnings

    Avis Budget Group (CAR) released its fourth quarter and full year earnings on 13th of February. As I had predicted in my previous article, the firm managed to exceed expectations both on revenue and earnings (The earnings for the fourth quarter came in line with consensus estimate but the annual EPS was more than the consensus estimate). However, the share price plunged 4% in the after hour trading. This was probably due to the overly conservative outlook of 2013 provided by the management. However, after the earnings conference call the smoke around the 2013 outlook cleared and AVIS's stock soared 7% to reach an all time high of $24.9 but later closed at 24.30 which is 5.4% higher than the February 13th's close. February 14th rally, could have been mostly due to short covering as I had anticipated in my article. However, crunching the earning numbers do indicate a fairly strong operating performance and strong growth prospect warranting further rally.

    Top Line

    Turnover in rental industry is dictated primarily by volume and pricing. There are other ancillary revenue streams as well such as insurance, GPS service etc. which are high margin and which grew at a healthy 12%, however I am limiting my analysis to core revenue generators. The fourth quarter revenue increased 4% YOY despite slight decline in pricing. This was due to a stronger demand translating into higher volume. The annual revenue increase was 25% mostly due to AVIS Europe's acquisition. Management has been very aggressive with pricing and as per the CEO, management has successfully increased pricing four times with little effect on demand since December. The breakdown of revenue can be found below.

    (click to enlarge)

    However, what interested me the most is the admission by management that off airport business grew by more than 9% and contributed north of $800 MM which is more than 10% of the total revenue. This number is crucial firstly because "off airport general use" rentals tend to get highest margin in the North American market and secondly this is consistent with my argument (that I presented in my last article) that reliable auto rental has the potential to snatch market share from individual car ownership. Management pointed out that there is plenty of opportunity of further growth mostly in unexplored geographies. However, growth may be much closer to home. I predict this segment (off airport general use rental) to continue growing proving to be an extremely lucrative income stream.

    Bottom Line

    The management seemed to be on a defensive over the costs associated with running the business. The CEO justified setting lower expectation for 2013 by pointing towards the volatility in the used car market. Used car market, which had been very strong in the last couple of years is showing signs of weakening thereby having the potential to steal some of AVIS' thunder. Management mentioned that gain on sale of vehicle was $125 MM compared to the expected figure of $100 MM in 2012. However, this pattern can very well reverse depending on the used car market. In fact, as per the CFO, the overly conservative estimate of 15% to 20% increase in fleet cost for 2013 takes into account inflation and pretty much the entire $125 MM that the firm made due to a strong used car market. Perhaps this was the reason stock price rallied after the call, since the management seems to have incorporated a fairly worse scenario in the 2013 outlook. In my opinion, although fleet cost will almost certainly increase in 2013 it will be nowhere near the 15 to 20% increase as projected by the management.

    Other encouraging signs in the earnings were growth in higher margin business such as international rentals (mostly license based) and small businesses. Margin expanded more than 1% during 2012 and stand at a healthy 11.4%.

    Nitty-Gritty

    The two most important indicator of operating performance for a rental company is the number of days on average its cars are rented and the average rental price the company can charge per day. Thankfully, AVIS provides these number which are in the following table:

    (click to enlarge)

    Crunching these numbers, one gets very interesting results. Firstly on an overall basis, Avis was able to keep its cars away for 64 days in the last quarter for an average price of $40.97 and for 259 days in the whole year for an average price of $41.11. It's important to note that 4th quarter utilization is usually poor in this industry. Notwithstanding the slight decline in pricing, the numbers are pretty impressive. Also, utilization has gone up compared to 2011 although at a lower price. However, North American scene does not look very impressive at the moment. For a 6% increase in fleet size, there is only 5% increase in output and that too at a lower cost. Perhaps this is due to lower margin segments such as corporate rentals growing more than higher margin businesses. International performance has been way more optimal and the sharp average price decline should stabilize once Budget gains a firm foothold in Europe and synergies of the acquisition of Avis Europe are realized.

    Zipcar

    Zipcar (ZIP) announced its earnings on the morning of 15th and consistent with my expectation has beaten estimates. Most of the earning has come from a tax benefit. However, even after ignoring the tax credit's effect, the earning still beats estimates. Zipcar continues to be a reliable engine of growth as the car sharing market is still largely untapped and Zip has an immense brand equity in this area. I expect another rally in CAR's stock price due to Zip's numbers. As of 31st Jan, there were more than 16MM short positions in Avis. Taking into account 4 MM volume on 14th February, there should still be significant short interest in this stock which could fuel the ascent of the stock price further.

    Conclusion

    A recent development has been the downgrade of CAR by TheStreet Ratings. As per the agency, despite multiple strength in the earnings report, the company's cash flow from operations has been weak. This downgrade baffles me as the cash generated from operating activities is fairly strong and has increased. Not sure which report the analysts at TheStreet referred to. Given the massive short interest in CAR (which I speculate are mostly institutional in nature), I am not surprised by attempts to depress the stock price.

    The fundamentals of this firm is strong and the earnings numbers were encouraging. The results reaffirm my view that there is plenty of growth opportunity for the firm and a very strong management team is on top of things. I also think that the outlook for 2013 is overly conservative and that the management has tried to undersell the growth prospects. I consider this a strong buy.

    Disclosure: I am long CAR.

    Tags: CAR, ZIP
    Feb 15 10:50 AM | Link | Comment!
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