Avis Price range Group, Inc. (NASDAQ:CAR) is among the world’s largest automobile rental corporations working in additional than 180 nations by a model portfolio that features “Avis”, “Price range”, “Payless”, and “Apex” amongst others. The corporate additionally owns the “Zipcar” automobile sharing community platform that counts over a million members. That is an business that received crushed through the pandemic however has been outlined by an ongoing restoration as journey rebounds.
Alternatively, inflationary price pressures and excessive fuel costs together with broader macro considerations have represented a number of the ongoing headwinds. Shares have been risky and down round 20% this 12 months. Nonetheless, we spotlight what have been strong monetary traits supporting a constructive long-term outlook.
We like CAR on the present stage and consider the latest correction as a shopping for alternative. The corporate is worthwhile with constructive free money stream whereas buying and selling at a reduction to its peer and competitor Hertz International Holdings, Inc. (HTZ). The latest development of declining fuel costs can work as a tailwind supporting rental automobile demand into the present quarter.
CAR Q2 Earnings Recap
Avis reported its Q2 earnings on August 1st with non-GAAP EPS of $15.94 which beat the consensus by $4.11. Income of $3.2 billion, up 37% year-over-year was additionally forward of estimates. Administration famous this was a report quarter for the corporate when it comes to gross sales and web earnings based mostly on the sturdy demand for the summer season journey season.
Whole rental days globally have been up 29% from Q2 2021 whereas increased rental pricing and robust car utilization charges have been key themes this quarter. For context, America’s area unit income per day (RPD) at $80.76 climbed 2% y/y however was additionally 44% increased than the Q2 2019 price as a pre-pandemic benchmark.
Whereas revenues within the Americas area climbed 30% y/y based mostly on a bigger fleet, the efficiency was much more spectacular from the smaller worldwide section, the place revenues elevated by 71% from the interval final 12 months. Adjusted EBITDA at $1.2 billion practically doubled from $624 in Q2 2021.
One other dynamic for the corporate has been its acquire in fleet car gross sales. Given constrained new automobile availability, used automobile costs have been elevated, which is mirrored in a slower depreciation price of its car asset base. The result’s the next residual worth at disposition as the corporate manages its world fleet for effectivity by extending the helpful life for rental functions. The implications are difficult, however one thought is that Avis Price range is in a great place because it sells off its totally depreciated automobiles at an accounting acquire whereas refreshing the fleet with newer fashions by subsequent 12 months.
Lastly, we are able to deliver up what has been a robust stability sheet. Avis Price range ended the quarter with $579 million in money and equivalents in opposition to $4.7 billion in company debt, excluding car financing. Contemplating the Q2 EBITDA run price close to $4.8 billion, the leverage price is below 1x. The corporate has been energetic with share repurchases, shopping for again round $1.7 billion in inventory this 12 months. Whereas nothing has been introduced, we would not be stunned at the potential of a dividend initiation down the road as there may be monetary flexibility for it.
By way of steerage, whereas the corporate is just not providing formal targets, the messaging from administration was constructive. The outlook is for rental automobile demand to stay elevated though the climb in RPD ought to reasonable. From the earnings convention name:
The underlying demand setting is presently sturdy for each our Americas and worldwide segments. Worldwide will proceed to see restoration in each rental days and RPD. Within the Americas, rental day development will proceed relative to 3Q21 and 3Q19, however with development moderating from the degrees we noticed within the second quarter… We imagine that the profit we’re seeing in rental days, depreciation, and most significantly price financial savings will greater than offset an RPD decline.
The web results of all that is at this level, we imagine that we’ll generate increased adjusted EBITDA within the third quarter of 2022 than we did within the third quarter of 2021, placing us on observe to ship the very best full 12 months adjusted EBITDA in our firm’s historical past in 2022.
CAR Inventory Value Forecast
Going again a couple of months, there was some concern out there that report excessive fuel costs by June would maintain drivers off the street and restrict the demand for rental automobiles the place clients are liable for gasoline. Trying by the Q2 numbers, it would not be a stretch to name this earnings report a blowout. In some ways, the business has recovered even quicker than anticipated through the depths of the pandemic.
That being stated, automobile rental is a notoriously troublesome enterprise to each function and put money into given the variety of transferring elements and forecasting challenges. Past merely the macro setting, the asset-heavy stability sheet with intensive required fleet investments means AVIS Price range Group faces publicity to traits in rates of interest and automobile market pricing. All that is on prime of intense competitors from not solely different massive and small rental automobile corporations but additionally ride-sharing alternate options.
All this helps explains the poor efficiency of CAR inventory worth, which is down practically 50% from its April excessive above $325.00. The excellent news is that a number of the headwinds have cleared up with the value of gasoline dropping sharply during the last two months, eradicating one layer of uncertainty. There may be nonetheless the query of if financial circumstances will deteriorate from right here, however we argue that the outlook has improved with indicators U.S. inflation is cooling off whereas the sturdy labor market signifies resiliency to client spending.
By this measure, CAR seems fascinating on this newest pullback down about 20% simply over the previous week since shares briefly approached $200. From the chart under, we be aware that the extent of round $165 all the way down to $150 has represented an space of help all 12 months. Holding an optimistic outlook on financial circumstances, we imagine the present pullback represents a brand new shopping for alternative forward of the following leg increased.
We talked about competitor and automobile rental peer Hertz International. On this case, HTZ has attracted some speculative consideration going again to the “meme inventory” phenomenon of early final 12 months. The result’s that whereas each CAR and HTZ seize comparable market dynamics, CAR trades at a big low cost when it comes to its ahead P/E ratio at 3.6x in comparison with HTZ at 4.7x. Equally, CAR’s EV to ahead EBITDA a number of at 7.3x compares to HTZ nearer to eight.2x.
The monetary and working traits do not justify these spreads in our opinion. For reference, CAR generated an adjusted EBITDA margin of 37.1% in Q2 in comparison with HTZ at 33% in Q2. Avis Price range additionally had stronger top-line development in opposition to HTZ which grew income by 25% in Q2. CAR’s stability sheet can also be considerably stronger with much less debt. Once more, this seems to be a case the place CAR is under-appreciated whereas HTZ instructions extra of the business headlines and inventory market consideration.
We price CAR as a purchase with a worth goal for the 12 months forward at $225 representing a 5x a number of on the present consensus 2022 EPS of $46.17 or an EV to ahead EBITDA ratio round 8.5x. The decision right here is that the U.S. economic system specifically will avert a deeper recession whereas the demand for automobile leases stays sturdy, shocking expectations to the upside. The power of CAR to proceed producing monetary efficiencies by fleet administration can drive continued earnings momentum. Long term, the return of enterprise journey and better margins can help a good increased share worth.
The opposite facet to dangers could be a extra regarding deterioration of the worldwide financial outlook. Gas costs are an vital monitoring level together with rate of interest volatility that might find yourself pressuring the inventory. Within the close to time period, will probably be vital for CAR to carry the $150 stage of inventory worth help.