CAR- AVIS

[wisborough]

This stock got hit 12% today down to $46.35  as it lowered revenue guidance and took its ebitda guidance down to the low end of the range.  It had been strong into its numbers (+5% yday) but down heavily over 2 days.

 

AVIS is the no3 (of 3) player in the rental car industry.

Industry set up is attractive. in USA, 3 players dominate  Hertz, Avis and Enteprise. 

Pricing has disappointed this year and expectations have weakened. Impact on top line offset somewhat by higher than expected residual prices.

Mgmt say environment has now normalised as industry fleet is  inline with demand.  Previously weak pricing has been blamed on over fleeted competitors namely Hertz.

Volume demand normally chugs along ahead of the economy and will be 4% this year, slightly weaker than earlier projections.

An important part of the cost is the depreciation of the vehicles - when the depreciation rises due to weakening used car pricing - this is seen as a bad thing - but given the attractive industry structure - the industry should be able to pass through cost increases to price without impacting demand.  Prices are expected to weaken in 2016, a headwind for sure unless it can be offset by pricing.

 

The business seems attractive as it generates a lot of free cash flow and has v high ROE as it uses ABS market to finance the cars and its own capex is mainly IT related.  So it has capex of $200mln on $900mln of ebitda.

 

This year it will generate over $500mln of free cash flow. It has made an acquisition for $200mln and will buy back $300mln of stock this year.  Its cash tax is small compared to the P&L but it seems sustainable for a number of years.  On a fully taxed basis the  fcf would be $350mln. 

 

The market cap of $5bn.  Avis has disappointed this year but with that cash generation - and active share buy bucks (it bought 3.5% of the company in 3Q alone) - I find it hard to see more downside on any reasonable time outlook.

 

 

[Picasso]

Besides less hair on CAR than HTZ, is there something about CAR which makes it financially more appealing?