Avis Budget Group Inc. (CAR, Financial) is a mobility solutions provider with its business spread across most of the world. The company operates through several brands, including Avis Car Rental, Budget Rent a Car, Zipcar and Maggiore Group.
The company was formed in 2006 when Cendant, a travel and real estate company, split into four separate companies. Avis Budget acquired Avis Europe in 2011, Apex Car Rentals in 2012, Zipcar in 2013 and Maggiore Group in 2015. It now operates in 180 countries.
Morgan Stanley analysts recently upgraded Avis to an overweight rating and raised the price target to $230 per share, citing the improving macroeconomic conditions for the car rental industry. At a forward price-earnings ratio of 6.30, Avis Budget's stock is too cheap to ignore.
Financial performance is trending in the right direction
Avis Budget Group had a strong start to 2023 with the company reporting revenue of $2.80 billion for the first quarter, a record high for that period and a 5% increase compared to the prior-year quarter. This growth was driven by strong demand and revenue per day in line with the previous year. The company's net income for the quarter was $312 million and adjusted Ebitda reached $535 million.
One of the key factors contributing to Avis Budget Group's continued success is its fleet utilization. The company's well-positioned fleet enables it to meet the growing demand for rental cars effectively. The company has sufficient liquidity to invest in its fleet as well, with $2.3 billion of funding capacity in addition to its total liquidity. Avis Budget’s well-laddered corporate debt and lack of significant maturities until late 2024 provide additional financial stability to pursue growth opportunities at a time when the demand for rental cars is stabilizing.
CEO Joe Ferraro has attributed the company's recent success to robust demand from international inbound and commercial customers, resulting in the highest number of rental transactions in its first-quarter history. Despite the growth in activity, Avis Budget continues to improve fleet utilization while keeping a close eye on operating costs. The company seems to have learned a valuable lesson from the pandemic to maintain an efficient business profile with little liquidity risk, which will help it grow sustainably in the future.
In the Americas segment, Avis Budget Group is seeing increased demand in key sectors, such as aerospace and defense contracting, technology and professional and financial services. The company is also seeing growth in cross-border inbound travel from Europe, the Middle East, Africa, Latin America, Asia Pacific and Canada. These positive trends, along with the ride-hail business, are expected to drive earnings growth in the coming quarters.
The company's international segment is also living up to its potential, aided by a strong recovery in rental days and robust revenue per day growth. While rental days are still below pre-Covid levels, the company seems to be on track to fully recover by next year. Management said it is encouraged by the increased inbound travel throughout the international markets and expects continued strong results going forward.
Fleet management is playing a crucial role in Avis Budget’s success. The company is capitalizing on the strong used car market and is focused on refreshing its fleet by disposing of high-mileage vehicles and adding newer models. This strategy will improve fleet rotation, resulting in increased utilization and revenue growth. The company’s focus on cost discipline while investing in people and systems to enhance customer service and operational efficiency is commendable as it continues to grapple with inflationary pressures.
Avis Budget has been actively pursuing its electric vehicle strategy, focusing on building a robust charging infrastructure to support its electrified fleet. The company continues to acquire a diverse electric vehicle fleet from various original equipment manufacturing partners, which helps mitigate risks related to residual values and potential recalls.
Looking ahead, the company anticipates a strong summer with continued growth in commercial and inbound business. Management is confident in the company’s ability to sustain momentum throughout the year. Further, analysts expect the normalization of the car rental industry to result in strong operational execution. The recent upgrade by Morgan Stanley analysts came on the back of the improving outlook for the industry and Avis Budget’s ability to generate higher revenue at lower costs compared to its closest rivals.
Industry outlook
The car rental industry is projected to experience steady growth, with Statista forecasting revenue increasing from $104 billion in 2023 to an estimated $119.3 billion by 2027 at a compounded annual rate of 3.49%. This market is expected to serve 620 million users by 2027. The demand for car rentals is highest for economy cars, followed by executive and luxury vehicles. The U.S. accounts for nearly 50% of the car rental industry revenue annually. While the industry has promising growth prospects, the dynamics of the used car market present both opportunities and challenges for Avis and its peers.
Used car inventory saw a 4.07% increase in availability from April to May, but this upward trend is expected to reverse, with ZeroSum predicting a 0.1% drop in used car inventory from April to May end-of-month. Notably, this would mark the first time in several months that both new and used vehicle inventories have decreased simultaneously. Further, used car prices have risen for the second consecutive month, indicating a 1.34% increase from April to an average price of $31,215 in May. However, it is important to highlight that despite recent increases, used car prices remain below the peak reached in 2022. The reduction in inventory levels and price increases in the used car market may lead to more cautious consumers, particularly considering the potential for an economic recession and more interest rate hikes.
In April, wholesale used vehicle prices experienced a 3% decline compared to March, reflecting automakers' increased production of new cars and trucks. Although prices remain elevated compared to historical figures, an index tracking vehicles sold at U.S. wholesale auctions are down 4.4% from April 2022. The pandemic-related supply chain disruptions and low supply of new vehicles have driven up used vehicle prices, with consumers turning to the used car market due to limited options and high prices of new cars.
The decline in wholesale used vehicle prices could potentially lead to lower retail prices. The average listed price of a used vehicle in February was $26,086, indicating a slight decrease from January. However, given the current supply situation, a massive decline in used vehicle prices seems unlikely as tight supply may provide some price support.
Used vehicle prices have become a significant point of interest for investors as an indicator of easing inflation. While the average used vehicle price experienced a slight decline after reaching a peak in April 2022, prices have since rebounded due to supply shortages and robust demand. The shortage of used vehicles can be attributed to factors such as high prices of new cars, limited trade-ins and reduced off-lease and rental car company sales.
As used car prices continue to rise, analysts believe buyers who can afford to do so should consider making their purchases sooner rather than later. Additionally, with expectations of rising auto loan rates due to increasing interest rates set by the Federal Reserve, the urgency to buy may be further fueled. According to Statista, car loan interest rates were nearly 7% in May.
Avis Budget, as one of the biggest players in the global rental car industry, will benefit from the recovery of used car prices this year as it refreshes its fleet regularly by selling its vehicles in the used car market. On the other hand, the company is likely to benefit from the affordability challenges consumers face as prospective car buyers may choose to rent a car for the time being until there is more clarity about the global economy and interest rates.
Takeaway
After suffering a massive blow from mobility restrictions in 2020 and 2021, Avis Budget Group is making a strong comeback helped by its massive scale. The company's renewed focus on profitability is an encouraging sign that points to higher earnings in the future. With a more streamlined business model, Avis Budget looks like a bargain at cheap valuation multiples.
