Avis' EPS Surged on Higher Sales

Zacks

Leading global car rental company, Avis Budget Group Inc. (CAR), posted stronger-than-expected second-quarter 2012 adjusted earnings of 94 cents per share, beating the Zacks Consensus Estimate of 70 cents. Driven by solid top-line growth along with improved margins, Avis Budget’s adjusted earnings increased 49.2% from the prior-period earnings of 63 cents a share.

On a reported basis, including one-time items, the company’s earnings per share came in at 66 cents in the reported quarter compared with 42 cents in the year-ago comparable quarter.

As per Avis Budget, travel demand across all markets remained strong in the quarter under review, while it continued to smoothly progress on the integration of the recently acquired Avis Europe business.

Quarter in Detail

During the quarter, Avis Budget’s net revenues jumped to $1,866 million from $1,412 million in the year-ago quarter. The year-over-year increase was the outcome of a 34% rise in rental day volume and a 43% increase in ancillary revenues, partially offset by a 3% drop in average daily rate. However, the company’s top line remains slightly below the Zacks Consensus Estimate of $1,898 million. Excluding the impact of the recent acquisition of Avis Europe, revenue increased 3% with rental volume exhibiting a 5% rise, while prices went down by 3%.

Driven by solid top-line performance along with lower fleet costs in North America, Avis Budget’s adjusted EBITDA for the quarter surged 39% to $266 million. Consequently, Adjusted EBITDA margin for the quarter expanded 80 basis points to 14.3%.

Segment-wise Performance

By segment, North American car rental revenue grew 3% to $1,184 million in the second quarter, primarily attributable to a 6% volume expansion and 5% increase in ancillary revenue, partially offset by a 3% decline in prices. Further, adjusted EBITDA grew 18% year over year to $184 million, primarily driven by increased revenue along with a decline of 13% in per-unit fleet costs.

International car rental revenue came in at $5579 million, rising over two folds from the year-ago quarter, benefiting mainly from the Avis Europe acquisition. Adjusted EBITDA increased by $39 million to $59 million, of which $33 million were contributed by the European operations.

Revenue at Truck Rental remains flat at $103 million, as benefits from a 1% hike in pricing were fully offset by a dip of 1% in volume. However, due to higher vehicle maintenance expenses, adjusted EBITDA decreased by $1 million to $17 million.

Balance Sheet

Avis Budget ended the quarter with cash and cash equivalents of $454 million and total corporate debt of $3,011 million. At the end of quarter, the company’s shareholder’s equity stood at $478 million.

Looking Ahead

Avis Budget continues to expect domestic fleet costs to decline in the range of 3% to 8% on a per-unit basis in fiscal 2012. The company’s non-vehicle depreciation and amortization costs are expected to be about $110 million in 2012. Net interest expenses are anticipated to be in the range of $260 million to $265 million, up from the previous forecast of $255 million due to hedging costs. The company’s effective tax rate in 2012 is expected to be in the range of 34%–38%, on an adjusted basis, while diluted shares outstanding is projected to be approximately 122 million.

Avis Budget is continuing with its efforts to reduce costs while enhancing productivity through its Performance Excellence initiative as well as five-point cost-reduction and efficiency improvement plan. The company expects its cost-saving initiatives to provide incremental savings of over $45 million in 2012.

Moreover, Avis Budget pointed out that it is on track with its integration plans for Avis Europe, acquired on October 3, 2011. In addition to this, the company expects its 2012 results to gain substantially from the integration-related synergies coupled with its strategic initiatives. Annual synergies from the Avis Europe acquisition are expected to be over $35 million.

Further, the company now expects full-year total revenue in the range of $7.3–$7.6 billion, implying a year-over-year growth of 24% to 29%. Avis Budget decreased its revenue forecast from $7.2–$7.5 billion in anticipation of unfavorable foreign currency-exchange rates.

However, the company still expects adjusted EBITDA for fiscal 2012 to increase 35%–43% year over year to $825–$875 million, while adjusted pre-tax income to be in the range of $450–$505 million, down from $460–$510 million estimated earlier.

Adjusted earnings per share for fiscal 2012 are expected in the range of $2.35–$2.65. The current Zacks Consensus Estimate for fiscal 2012 stands at $2.49 per share.

Our Recommendation

Avis Budget Group is the leading general-use vehicle rental company in North America, Australia and New Zealand. Moreover, with a formidable network of more than 10,000 rental locations and 350,000 vehicles, the company boasts a well-established position in a highly competitive vehicle rental industry.

Avis follows a core global strategy of partnering with leading travel brands to expand its customer reach while creating additional demand. The company recently made its first appearance in Taiwan, in an effort to expand its Asian operations. Avis Budget’s decision to enter Taiwan is backed by growing car rental demand on the island as well as its speeding economic growth.

Moreover, in order to expand its geographical presence, the company is pro-actively looking for strategic acquisitions and alliances to enhance its growth opportunities. The recent acquisition of Avis Europe is one of the major steps taken by the company to enhance its operational footholds in global markets, especially in China and India. Moreover, Avis Budget has launched its own sales force in the European region as a means to own and leverage the local opportunities and customers to drive inbound business. Further, the company still expects annual synergies from the Avis Europe acquisition to be over $35 million, within the first anniversary of the acquisition.

The company faces intense competition from other established players, such as Hertz Global Holdings Inc. (HTZ), Enterprise Rent-A-Car, Dollar Thrifty Automotive Group Inc. (:DTG) and Ryder System Inc. (R).

Avis Budget maintains a Zacks #3 Rank, which translates into a short-term Hold rating. However, we are maintaining a long-term ‘Outperform’ recommendation on the stock.

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