Avis Budget Group (CAR)
from DividendLab
Avis Budget Group (CAR) does not pay dividends but offers excellent capital appreciation upside with shares projected to deliver about a 5x return over the next five years from $28 currently to $135 by 2018 based on consensus earnings growth estimates of 21.6% annually. Cut that in half to a $67 price target by 2018, just to be safe, and you’ll still more than double your investment off current levels.
Shares currently bear a trailing P/E of 22 with a market capitalization of $3 billion and a forward P/E of 10.5. As the graphs below show, both trailing and forward P/E are well below recent historical levels but at near-term highs.
In addition, the company’s Forward PEG ratio (forward P/E divided by projected five-year earnings growth – a good indicator of valuation relative to growth prospects) severely lags historical levels and is now near all time lows. A smaller forward PEG ratio suggests undervaluation relative to growth and a good time to buy.
Avis Budget has a Price/Sales ratio of about 0.40 and a Price/Cash Flow of merely 1.7. So, on valuation relative to future earnings growth prospects, shares appear to offer compelling upside.
Technically, Avis Budget shares have a Relative Strength Index (RSI) of 28 – any reading below 30 suggests shares are oversold and could see buyers dipping in. ...
Aggressive Expansion Initiatives
Avis Budget appears focused on segmenting the market and developing or acquiring car rental services that fit each segment. The Avis brand serves the high-end segment such as corporate executives on the go, while the Budget brand targets cost conscious mid-tier corporate and retail customers.
In June 2013, Avis Budget paid $50 million to acquire Payless Car Rental, a deep-value car rental company that serves a rapidly growing market of tight-budget customers. Payless has over 120 global locations and helps the company differentiate its mid-tier Budget brand from deep-value customers who are willing to sacrifice ride features for a lower price.
Avis acquired car sharing network Zipcar in 2013. With Zipcar, Avis gains a foothold in the rapidly growing car sharing market made popular by social networks. Zipcar also helps Avis Budget expand its customer base to students and urban renters, with 810,000 members spread across high concentration urban areas in North America, the United Kingdom and Spain. Zipcar is also actively expanding its presence in university towns.
Zipcar is a model for the future and Avis Budget has smartly chosen to acquire this company for a very reasonable price while getting access to its younger client base. Zipcar could well change the face of traditional car rental and increasingly add to the company’s bottom-line while reducing fleet expenses.
More recently, in August 2013, Avis Budget acquired a 50% stake in its existing licensee in Brazil with a $50 million investment that will help the operator capture a larger share of Brazil’s fast expanding car rental market (13% annual growth). This acquisition is in step with Avis Budget’s strategic initiatives to grow its global footprint and expand in fast-growing markets.
The company’s aggressive expansion through acquisitions and value-added services is expected to drive earnings growth at strong double-digit rates going forward.
Company Executing to Plan
In Q2 2013, Avis Budget grew revenues at 7% from higher volume and pricing in North America, rapid Budget growth in Europe and Zipcar integration, despite macroeconomic headwinds in its key Europe and Australia markets. This was the 12th consecutive quarter of year-over-year growth and the second consecutive quarter of positive pricing. ... Looking ahead, the company expects positive volume and pricing in North America with growth driven by international inbound, small business, specialty and premium, off airport and prepaid rentals. Europe should benefit from strong Budget growth and summer travel while the focus on Latin America/Asia Pacific is a combination of growth and cost management.
For 2013, Avis Budget expects consolidated revenue of $7.8 – $8 billion, adjusted EBITDA of $750 – $800 million, diluted EPS of $2.05 - $2.35 and free cash flow of about $300 million. Management also expects significant savings from recent debt refinancing.
Summary
Avis Budget is a well-known global brand with a stable $7.4 billion revenue run rate and shares that appear reasonably priced relative to historical measures and future growth estimates. Shares are also down considerably after recent profit taking and Q2 earnings disappointment even though the drop in income was tied to manageable one-off expenses. ... Consider buying this stock for significant 5-year capital appreciation. And use further share price weakness as an opportunity to build positions.
Todd Johnson, Dividend Lab, www.dividendlab.com, 505-514-0036, September 9, 2013