Avis Funds Group: Primed For One other Quick Squeeze (NASDAQ:CAR)


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Main world rental automotive firm Avis Funds Group Inc. (NASDAQ:CAR) has been affected by short-sellers via the pandemic, and justifiably so, however the fundamentals are shifting. CAR is now leaner and higher positioned to leverage a cyclical rebound as economies reopen post-COVID and journey restrictions are lifted.

Internet, elevated leisure demand for rental vehicles and a leaner, extra versatile value construction ought to permit CAR to maintain structurally increased margins and regular earnings progress going ahead. Plus, the steadiness sheet is the strongest it has been for years – the price of fleet financing is on the decline, and leverage ranges are very manageable with no near-term maturities, creating ample flexibility for extra shareholder-friendly capital allocation selections. The newest buyback authorization is a key catalyst as brief curiosity stays elevated, making a compelling setup for an additional brief squeeze situation to play out this 12 months.

Upsizing the Buyback

Buybacks have been prime of thoughts for CAR in current months – the corporate repurchased $1.4bn in inventory within the again half of final 12 months (equal to ~14.2m shares or >20% of shares excellent pre-authorization). Many of the buybacks have been performed in 3Q, with CAR repurchasing ~$463m in 4Q at a decelerating tempo. Per firm disclosures, CAR solely repurchased ~$136m via November/December following the brief squeeze, probably reflecting administration’s opportunism.

Since then, nevertheless, the inventory has normalized decrease, and though administration despatched out blended alerts on the 4Q name, leverage ranges of 1.5x at year-end (nearly two turns beneath the 3-4x goal) meant the corporate was at all times prone to rethink shopping for again shares opportunistically. So, it got here as little shock that Avis introduced one other $1bn in share buyback authorization this month – clearly, administration nonetheless believes the inventory is undervalued and, for my part, has turned to the extra buyback as a method of catalyzing a better professional forma valuation.

Sizing the Potential Buyback Impression

If we account for the extra $1bn licensed by the Board, CAR now has $1.16bn to deploy for the 12 months. Reconciling this with the $959m remaining in authorization as of 2021 and the $160m in extra of the newest authorization, this means ~$800m of buybacks via Mar sixteenth (the date of the $1bn buyback announcement). Thus, relying on how a lot of the $800m was deployed after Feb eleventh (the discharge of its 10-Ok submitting) when CAR disclosed 53.8m shares excellent, the share depend might now be nearer towards the ~50m mark (assuming a $200/share common).

So how a lot additional might CAR shrink the float? Assuming a ~$250 share worth sustains into the top of the 12 months, CAR would have sufficient to buyback ~4.6m shares based mostly on the $1.16bn authorization. This might additionally imply CAR probably ends the 12 months with 45.4m shares excellent if Avis makes use of its total buyback authorization (or a ~10% tailwind to EPS). The extra fascinating angle to this play, for my part, is the implication for the shorts – given >20% of the float (>7m shares) is at present offered brief, this is able to indicate Avis has the firepower to squeeze a major quantity of the brief curiosity over the course of the 12 months.

Avis budget group percent of float short
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Strong Stability Sheet Creates Optionality

Essentially, buybacks are sign – CAR’s further buyback authorizations point out administration and the Board see worth within the inventory, and thus, buybacks have been the go-to capital deployment technique up to now. Extra importantly, although, CAR has the steadiness sheet to help its buyback plans – even with the extra buyback, Avis is on monitor to generate $1-1.5bn of FCF this 12 months, which ought to end in ~$2.5bn of web company debt (i.e., excluding fleet debt) in 2022.

Assuming the 1Q momentum sustains, there could possibly be upside to this determine – whereas administration avoided offering ahead steering this time round, the 4Q commentary indicated value and income optimization efforts are taking maintain and may drive CAR’s finest 1Q adj EBITDA final result in years (1Q tends to be a seasonally weak quarter). This outlook additionally accounts for the seasonal weak spot in volumes coming off the Omicron variant affect, so a post-pandemic rebound within the coming quarters ought to help 2022 outperformance, for my part.

Avis 1Q EBITDA and FCF Projections

JP Analysis

The corporate already had a cushty liquidity place of ~$757m at end-2021, with a further $2.6bn of fleet funding capability and web leverage of ~1.4x – the bottom ever reported by the corporate. With FCF additionally set to inflect increased, I see restricted danger to credit score rankings from the upsized buyback. Even when administration allocates some funds for a partial redemption of EUR900m of callable EUR bonds, the FCF alone ought to greater than cowl the funding requirement. Given the ample headroom, I feel extra businesses might observe S&P’s current improve to BB/steady (from B+), offering one other potential steadiness sheet catalyst for the 12 months.

Avis Debt Projections

JP Analysis

A Cyclical Rebounder with a Quick Squeeze Catalyst

CAR benefited from a major brief squeeze final 12 months, and administration seems to be reusing the playbook once more with $1bn of further buybacks licensed for the 12 months. Clearly, the Board sees worth right here, and with the improved steadiness sheet flexibility, buybacks ought to set a ground on the inventory worth going ahead.

To be clear, the CAR story is not all concerning the brief squeeze potential – basically, the outlook is as sturdy because it’s ever been, with post-pandemic margins structurally increased and disciplined industry-wide provide/demand traits additionally driving pricing sustainability. Past the present buyback authorization, the rising money technology ought to present additional steadiness sheet catalysts going ahead, not solely from buybacks (prone to be the precedence until the inventory worth pops) but in addition from additional deleveraging (and doubtlessly score upgrades) in addition to growth-driven M&A. At ~6x EV/EBITDA, the YTD inventory worth rally nonetheless has legs.

CAR price and EV to EBITDA
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