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Avis Budget Slips to Neutral

Zacks Equity Research

We downgraded our recommendation on Avis Budget Group Inc. (CAR) to Neutral as the company trimmed its revenue outlook for fiscal 2012, following lower-than-expected net sales results for the second quarter of fiscal 2012. However, we believe Avis Budget’s continuous efforts of introducing new ideas and investments in technology upgrade will likely neutralize the negative factors.

Avis Budget’s net revenue of $1,866 million for the second quarter of fiscal 2012 fell short of the Zacks Consensus Estimate of $1,898 million. Consequently, the company lowered its fiscal 2012 revenue guidance range to $7.2 – $7.5 billion from $7.3 – $7.6 billion forecasted earlier.

However, sustained focus on productivity and cost containment initiatives along with lower fleet costs drove Avis Budget to post better-than-expected bottom line performance. The company’s adjusted earnings of 94 cents per share surged over 49% from the year-ago quarter and beat the Zacks Consensus Estimate of 70 cents.

Going forward, we believe the ongoing global economic sluggishness may have an adverse impact on the travel trends. Nevertheless, in our view, Avis Budget’s strong focus on cost reductions will help the company achieve its goal of higher operating margins.

Further, the leading general-use vehicle rental company with a formidable network of more than 10,000 rental locations and 350,000 vehicles in sync with its strategy to expand geographically continues to pro-actively look for strategic acquisitions and alliance opportunities.

The acquisition of Avis Europe in October 2011 was an important step in this direction. Currently, the company remains on track with its integration plans for Avis Europe and expects its 2012 results to gain annual synergies of over $35 million, within the first anniversary of the acquisition.

Another core global strategy in Avis’ kitty is that of partnering with leading travel brands to expand its customer reach while creating additional demand. One such partnership of recent times includes its tie-up with leading German automobile club, Allgemeiner Deutscher Automobil-Club, which is based on the value of its brands and its ability to provide synergies to its partners that will benefit their brands and businesses.

Avis has always tried to capitalize on the other inbound revenue opportunities by focusing on new ideas and investments in its brands and technology upgrade. The company has installed virtual car rental technology in over 25,000 vehicles.

The technology permits travelers to reserve, pick up and return rental vehicles through their smart phones. Additionally, they receive an automated electronic receipt after the completion of the rental, enabling the company to minimize cost while enhancing profitability.

Moreover, in a drive to further enhance rental experience for its customers and making travel more convenient, Avis recently kicked-off its Avis Preferred(R) Select & Go service at 25 airports across the United States. This service will provide registered customers three unique facilities including driving their pre-assigned vehicles directly from the airport, exchanging their car from a designated area without additional charge and upgrading their vehicle from a designated area for an additional payment.

Avis had initially introduced this vehicle selection service in June 2012, with a mission to cover 50 airport locations around the United States and Canada by the end of the year 2012.

Avis Budget competes with Hertz Global Holdings Inc. (HTZ), Enterprise Rent-A-Car and Dollar Thrifty Automotive Group Inc. (DTG). On account of a host of positives offset by the concerns of lowered guidance, the company maintains a Zacks #3 Rank, indicating a short-term Hold rating.

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