Avis Budget Group - A Thought Experiment

Bruder Capital, LLC profile picture
Bruder Capital, LLC


  • CAR reported lower Q4 earnings and issued weak guidance.
  • Based on large hedge fund ownership of the equity, cash flow might be used to buy back common.
  • But, then again, it might not.

Avis Budget Group, Inc. (NASDAQ:CAR) caught multiple equity analyst downgrades last week after release of its Q4'16 financial results, but unlike Hertz Global Holdings, Inc. (HTZ), Avis has been generating stable cash flow and is not headed toward a likely debt covenant breach this quarter. What the two car rental companies share in common are equity holders with activist agendas - in CAR's case, a group of hedge funds owning 23.2% of the common and angling for share repurchases and, in HTZ's case, a more concentrated group of hedge funds holding 53.1% of the common and depending on 35% shareholder Carl Icahn to make a decision for it. Icahn's intentions remain unknown.

On February 15th, CAR reported Q4'16 revenue, EBITDA and adjusted net earnings of $1.88 billion, $121.0 million, and $0.15 per share, respectively, missing consensus estimates of $1.97 billion, $132.8 million, and $0.17 per share, respectively, by 4.4%, 8.9%, and 11.8%, respectively. Commercial demand is 45% of CAR's revenue while leisure is the other 55%. Soft commercial demand amid a glut of competing cars sent Q4'16 pricing lower by 70 basis points year over year. Both rental days and average revenue per rental day dropped by 1%.

Despite more positive macro expectations for travel, lodging and airline bookings, CAR management issued subdued FY'17 guidance indicating just small upticks from FY'16 results. The FY'17 revenue range of $8.80-8.95 billion is just on top of the $8.75 billion recorded for FY'16. The midpoint of management's adjusted EBITDA range of $840-920 million for FY'17 is $880 million versus the $875 million produced in FY'16. The midpoint of the free cash flow range of $450-500 million for FY'17 is just above the $472 million the Company booked in FY'16. The $3.40 midpoint of adjusted EPS of $3.05-3.75, however, would be a solid 16% improvement from the $2.93 adjusted EPS in FY'16. Alas, 10 cents of that improvement is ascribed to expectations of more favorable

This article was written by

Bruder Capital, LLC profile picture
Three decades of capital markets experience: institutional trader for Lehman Brothers, M&A banker at Merrill Lynch, research, sales and trading positions at KeyBanc, RBC Capital Markets, and BNP Paribas, private equity valuation consultant for PwC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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