AVIS BUDGET GROUP INC CAR S
February 01, 2015 - 10:12am EST by
Fletch
2015 2016
Price: 57.31 EPS 3.2 0
Shares Out. (in M): 106 P/E 17.9 0
Market Cap (in M): 6,089 P/FCF 14.7 0
Net Debt (in M): 2,547 EBIT 738 0
TEV: 8,636 TEV/EBIT 11.8 0
Borrow Cost: General Collateral

Sign up for free guest access to view investment idea with a 45 days delay.

  • Rental & Leasing
  • Auto Rentals
  • Margin compression
  • Oligopoly
  • Competitive Threats
  • Industry Disruption
  • Secular headwinds
  • Cyclical
 

Description

 

Avis Budget Group

 

 

Company Description

 

Avis Budget Group (“Avis”) is a global provider of vehicle rental and car sharing services, operating three of the most recognized brands in the industry through Avis, Budget and Zipcar. Avis operates the Avis and Budget brands in approximately 175 countries throughout the world.

 

Investment Summary

Short equity at 57.31. Despite the Car Rental business consolidating into an oligopoly they face “Business Model Disruption” from the likes of Uber and Lyft, European Weakness and F/X issues that will pressure revenues. An increase in fleet costs and their high exposure to short term interest rates will increase expenses and compress margins as the Federal Reserve moves to increase short term rates in 2015. Additionally Low profitability, low return on investment, increasing exposure to Auto residuals and a high valuation relative to historical norms makes Avis a compelling short.

 

Capital Structure & Relevant Financial Metrics

 

 

Coupon

Maturity

9/30/14

Leverage

$1.8 Billion Revolver (L+225)

2.503%

10/3/2019

65.0

 

Term B (L+225)

2.503%

3/15/2019

982.0

 

Total Senior Secured Debt

 

 

1,047.0

1.2x

 

 

 

 

 

 

Senior Bonds

 

4.875%

11/15/2017

300.0

 

Senior Bonds (L+275)

3.003%

12/1/2017

250.0

 

Senior Bonds

 

9.750%

3/15/2020

223.5

 

Euro Senior Bonds

6.000%

3/1/2021

508.2

 

Senior Bonds

 

5.125%

6/1/2022

400.0

 

Senior Bonds

 

5.500%

4/1/2023

500.0

 

Other

 

5.000%

 

31.0

 

Total Debt

 

 

 

3,259.7

3.8x

Cash

 

 

 

713.0

 

Net Debt

 

 

 

$2,546.7

 

 

 

Shares

Price

 

 

Equity Cap Class A

106.245

$57.31

6,088.9

 

Total Equity Value

 

 

$6,135.6

 

 

 

 

 

 

 

Total Enterprise Value

 

 

$8,635.5

10.0x

 

 

 

 

 

 

 

2012

2013

LTM

E. 2014

E. 2015

Revenues

$7,357

$7,937

$8,447

$8,526

$9,052

EBITDA Margin

11.4%

9.7%

10.2%

10.2%

11.0%

Adj. EBITDA

$840

$769

$861

$872

$996

CAPEX

$132

$152

$187

$195

$210

Interest Expense

$268

$228

$219

$150

$150

Taxes

$10

$81

$116

$184

$222

FCF

$430

$308

$339

$342

$413

Earnings

$290

$16

$205

$311

$386

EV/EBITDA

10.3x

11.2x

10.0x

9.9x

8.7x

P/E

21.0x

380.6x

29.7x

19.6x

15.8x

Price / FCF

14.2x

19.8x

18.0x

17.8x

14.7x

ROIC

5%

 

 

 

 

Profitability

8%

 

 

 

 

 

 

Investment Thesis

 

  • CAR has had a goal of achieving $1 billion of EBITDA in 2015, which is in fact the current consensus estimate for 2015

    • Company has expected to achieve this goal from a combination of revenue growth (mostly through pricing) and margin enhancement

    • Avis has done an excellent job of executing and will probably hit their 2014 numbers. But, they need to grow EBITDA even faster in 2015 in order to achieve their $1 billion goal

    • However, items that are out of the control of management will prevent Avis from achieving these goals and may eventually, cause a shrinking of the overall “car rental” market

  • Revenues - Avis is expecting to increase revenues in 2015 (consensus 6% increase) mostly through price increases, especially since price increases are the largest driver of EBITDA (1% change in pricing = $49 million in EBITDA)

    • Since the Car Rental business has consolidated into an Oligopoly (Enterprise, Hertz and Avis have 96% of the market) the expectations are for continued pricing power

  • However, the prolific increase in use of Car-Sharing & Ride-Sharing Companies (like Uber & Lyft, among other) will be highly disruptive to the Car Rental business. At the very least the will impact the car rental markets ability to raise prices. At a recent investor conference, Avis stated that they do not think ride sharing will have any impact on their car Rental business, but may have a slight impact on Zipcar. I think that they are in for a rude awakening

    • Renting a car is much more expensive than headline rate (generally 50% more), and is extremely inconvenient as Renters:

      • generally sign up for many of the “Ancilliary” options (like insurance & GPS)

      • must pay for gas

      • must pay for and find parking

      • must collect their luggage, then wait for a complimentary shuttle, schlep their luggage to the rental company, wait on-line for a representative and then finally get their car – all in all, a highly frustrating and lengthy process

      • Allocate extra time when returning the car before a flight

    • Car-Sharing services like Uber are now available in most major cities and will probably be available in most places in the near future

      • the ease of use, makes it an extremely pleasant experience – no waiting & or hailing

      • the cost, which is continuously declining, makes it an economical and competitive

    • Companies are already allowing employees to use Uber, instead of renting cars and the ease of use make it an easy preference, especially since these users care more about convenience than cost

    • Avis is currently using free cash flow to buy back stock as they believe that the $500 million they spent Zipcar will be their answer to evolving technology

      • I believe that Zipcar will actually be obliterated (and probably written down) as similar car sharing business are being started frequently (even car manufacturers like BMW have gotten into this business) and Uber & Lyft are much more convenient

    • In order for Avis to raise prices they will need Enterprise (the market leader with 50% share) and Hertz to raise rates as well

      • Unlike Avis, Enterprise has said that they are acutely aware of the disruption that can/will be caused by car sharing services

      • As Enterprise will look to maintain market share, and since they are the dominant player in the Insurance Accident Replacement market, I believe that they will be reluctant to raise prices and look to maintain their market share

    • Not implying that it will be a 100% substitution of the car rental market, but it will definitely be disruptive and will certainly be a headwind for their revenue

  • Europe & F/X

    • The currencies of their big 4 international countries are currently down 9-15% against their 2014 average. If sustained, this will cause a $30-45 million hit to EBITDA

    • European economy is still weak and it is not realistic to assume much growth

  • Costs: Avis has done an excellent job lowering costs and increasing margins. However, going forward, most of the margin gain will be attained from an increase in revenues. Additionally, they are now facing increases in costs that are beyond their control. Including:

    • Increasing car prices, which will increase their depreciation expense and financing costs. Company is expecting fleet costs to be up 3-6% in 2015, with acquisition costs up 1%

    • Increasing of Short Term Interest Rates: While many people think that long term rates will stay low for a long time, Avis is one of the few Non-Finance companies that have extreme exposure to short term (LIBOR) rates.

      • Fleet financing of its fleet is currently at $9.5 billion, with an average balance of $8.9 billion over the last 4 quarter

      • These financing are extremely lucrative, averaging around 3% rate of interest

      • The company expenses these costs and therefore they are included in EBITDA

      • The market is expecting the FOMC to raise interest rates this year

      • A 25 bps raise in interest rates would equal $22 million increase in this expense, which is a 8% increase in this expense line would result in approximately a 2.5% decrease in EBITDA

    • Residuals: Historically, Car rentals bought most of their fleet through “Programs” with the OEM’s where the OEM’s took the residual risk of the cars. However, since 2007, OEM’s have been shifting a higher percentage of the residual risk to the Rental Company’s

      • In 2007, 73% of their fleet were program cars with the OEM’s, in 2013 it was only 37%. Company is expecting to increase this number to 50% in 2015

      • Company has already said that they believe that there will be pressure on residual values next year (3%-6% increase in fleet costs, 3% of which is coming from a drop in residuals)

      • Used car prices have been very strong since 2009 and pretty steady for the last few years, but any significant drop in used car prices will have an exaggerated effect on earnings because of the amount of “risk” cars the company has. While this is not anticipated, it is a downside risk.

        • Residual prices are now approximately 79% of cost, they generally have been as high as 81%, so residuals are close to their highs. Company expects this to drop to mid 70’s in 2015. Residuals have dropped to below 70% during times of stress.

  • To sum up, I believe that EBITDA will be pressured and the Company will be forced to lower their expectations for $1 billion in EBITDA in 2015. In fact, I think that EBITDA will be $940, 6% below consensus (implying $340 million of earnings or $3.20 a share), with a significant possibility that it will be even lower and a lot closer to 2014’s EBITDA

 

  • Valuation:

    • Much like other Auto related business’s, Rental Cars are cyclical and therefore historical multiples have had large ranges over the past 9 years (since its spinoff).

      • EV / LTM EBITDA has ranged between 4.3x-17.1x with a 7.1x Median

      • EV / 1yr Forward EBITDA has ranged between 3.5x-24.6x with a 5.6x Median

      • P / LTM Earnings has ranged between 4.2x-46.3x with a 10.6x Median

      • P / 1yr Forward Earnings has ranged between 0.5x-43.6x with a 6.0x Median

    • Currently, Avis is trading above the historical Medians. Based on Consensus Avis is trading at

      • 10.1x EV / LTM EBITDA

      • 8.8x EV / 2015 EBITDA

      • 20.3x Price / LTM Adjusted Earnings

      • 15.0x Price / 2015 Adjusted Earnings

    • The current valuations suggest the market believes that Avis is in a period of “under earning” and that there will continue to be strong growth over the next few years

    • I believe that once investors see that the secular headwinds will overpower the cyclical earnings momentum and that Avis will indeed hit peak earnings in 2014 / 2015 then lower multiples will be assigned to the stock

    • Assuming that Avis will trade closer to its median multiples, Avis should trade somewhere between $22 and $34

      • 7.1x 2014 Consensus EBITDA = $34.3

      • 5.6 2015 EBITDA = $28.5

      • 10.6 2014 Consensus Earnings = $31.0

      • 6.0x 2015 Adjusted Earnings = $21.8

Catalysts

 

  • 4Q Earnings where expectations regarding 2015 EBITDA will be reset

  • Fed lifting short term interest rates

  • Changes in Manheim Index

  • Proliferation of Uber, Lyft and other car-sharing services

  • Uber IPO

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 

  • 4Q Earnings where expectations regarding 2015 EBITDA will be reset

  • Fed lifting short term interest rates

  • Changes in Manheim Index

  • Proliferation of Uber, Lyft and other car-sharing services

  • Uber IPO

    sort by   Expand   New

    Description

     

    Avis Budget Group

     

     

    Company Description

     

    Avis Budget Group (“Avis”) is a global provider of vehicle rental and car sharing services, operating three of the most recognized brands in the industry through Avis, Budget and Zipcar. Avis operates the Avis and Budget brands in approximately 175 countries throughout the world.

     

    Investment Summary

    Short equity at 57.31. Despite the Car Rental business consolidating into an oligopoly they face “Business Model Disruption” from the likes of Uber and Lyft, European Weakness and F/X issues that will pressure revenues. An increase in fleet costs and their high exposure to short term interest rates will increase expenses and compress margins as the Federal Reserve moves to increase short term rates in 2015. Additionally Low profitability, low return on investment, increasing exposure to Auto residuals and a high valuation relative to historical norms makes Avis a compelling short.

     

    Capital Structure & Relevant Financial Metrics

     

     

    Coupon

    Maturity

    9/30/14

    Leverage

    $1.8 Billion Revolver (L+225)

    2.503%

    10/3/2019

    65.0

     

    Term B (L+225)

    2.503%

    3/15/2019

    982.0

     

    Total Senior Secured Debt

     

     

    1,047.0

    1.2x

     

     

     

     

     

     

    Senior Bonds

     

    4.875%

    11/15/2017

    300.0

     

    Senior Bonds (L+275)

    3.003%

    12/1/2017

    250.0

     

    Senior Bonds

     

    9.750%

    3/15/2020

    223.5

     

    Euro Senior Bonds

    6.000%

    3/1/2021

    508.2

     

    Senior Bonds

     

    5.125%

    6/1/2022

    400.0

     

    Senior Bonds

     

    5.500%

    4/1/2023

    500.0

     

    Other

     

    5.000%

     

    31.0

     

    Total Debt

     

     

     

    3,259.7

    3.8x

    Cash

     

     

     

    713.0

     

    Net Debt

     

     

     

    $2,546.7

     

     

     

    Shares

    Price

     

     

    Equity Cap Class A

    106.245

    $57.31

    6,088.9

     

    Total Equity Value

     

     

    $6,135.6

     

     

     

     

     

     

     

    Total Enterprise Value

     

     

    $8,635.5

    10.0x

     

     

     

     

     

     

     

    2012

    2013

    LTM

    E. 2014

    E. 2015

    Revenues

    $7,357

    $7,937

    $8,447

    $8,526

    $9,052

    EBITDA Margin

    11.4%

    9.7%

    10.2%

    10.2%

    11.0%

    Adj. EBITDA

    $840

    $769

    $861

    $872

    $996

    CAPEX

    $132

    $152

    $187

    $195

    $210

    Interest Expense

    $268

    $228

    $219

    $150

    $150

    Taxes

    $10

    $81

    $116

    $184

    $222

    FCF

    $430

    $308

    $339

    $342

    $413

    Earnings

    $290

    $16

    $205

    $311

    $386

    EV/EBITDA

    10.3x

    11.2x

    10.0x

    9.9x

    8.7x

    P/E

    21.0x

    380.6x

    29.7x

    19.6x

    15.8x

    Price / FCF

    14.2x

    19.8x

    18.0x

    17.8x

    14.7x

    ROIC

    5%

     

     

     

     

    Profitability

    8%

     

     

     

     

     

     

    Investment Thesis

     

     

    Catalysts

     

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

     

    Messages


    Subjectquestions
    Entry02/01/2015 04:28 PM
    Membersocratesplus

    thanks for writeup.

    in terms of the adverse impact of uber etc on the rental car industry, you focus on car but not the other rental cos. did you look at them too and decide that car was the best short/most adversely affected?

    isn't the adverse effect of uber etc going to be felt most by zipcar (as you say) but not the core rental business, much of which is airport derived (which uber etc doesn't seem to be focusing on)? if so, then will adverse effect on zipcar move the needle?

    won't drop in gas prices increase travel and usage this summer, to car's benefit?


    SubjectPushback on the thesis
    Entry02/01/2015 05:11 PM
    Memberjso1123

    A lot has been made of the Uber threat to rental cars.  However I'm not convinced the markets really overlap.  

    Uber is a taxi-competitive business.  All major and minor metros have taxi services - virtually 100% of the time at the airport at arrival and locally if you call.  I totally agree Uber is a better product - not so much in terms of pricing but in terms of driver/customer experience.  So I agree Uber will displace taxis.

    Rentals cars really address a very different market:  

    - For business customers, they appeal to users that are traveling far distances with multiple stops often over multiple days.  When I travel for business, I always prefer a taxi/Uber if I can get one.  But there are many instances where a rental car makes a lot more sense.  And this is more applicable for salesman who go to territories with the idea of seeing a lot of customers in a short period of time.  Ultimately Uber is going to be much more expensive per mile because it comes with a driver.  

    - For leisure customers, it's a similar dynamic.  You get a taxi/uber when you are goign to one place and staying put, you get a rental car when you are going to multiple places or want to have a lot of local mobility wherever you are going.

    Bottom line is that aren't these markets really separate and haven't they always been?  And therefore is Uber really a threat to the rental car model?  I get how they will beat taxis (better product).

    As it relates to Lyft:  I think there are real limits to the "shared" economy to use Elon Musk's quote.  I think things like Lyft can expand the market for taxi services by taking it to a lower price point but I don't see business users taking Lyft any more than I see them staying in someone's apartment via AirBnB.

    Lastly on pricing power:  you need to differentiate between on-airport (where share is distributed between HTZ/CAR/Enterprise 1/3 1/3 1/3 each) and off-airport (where Enterprise dominates).  They are very distinct markets and on-airport is the key driver for CAR and HTZ.  HTZ has been the key problem for on airport pricing due to botched DTG integration and over-fleeting under old CEO and now they seem to be taking a different tact under Icahn/new CEO (witness the press release they put on in Dec signaling a price hike to CAR and Enterprise).  I'm not sure why Enterprise wouldn't match that as a 33% market share holder...the on-airport hike has no impact on their off-airport business.  A 5% increase in car costs (1/3 of cost structure) requires a ~1-2% price increase to offset that.  To put that in perspective, a $60/day rate needs to go up $0.60-$1.20 to offset it.   Doesn't seem hard to envision if the industry starts acting sensibly under new HTZ leadership.

    Lastly, I'd also push back on your organic growth rates - the industry grows in line w/travel and leisure demand which continues at above-GDP growth rates.  So volumes tend to rise say ~3% per year.  

     


    SubjectRe: Re: Re: Re: Re: questions
    Entry02/01/2015 10:58 PM
    Memberjso1123

    I think this a really interesting one to debate.  We have to start by conceding that rental car is cheaper per hour and therefore it all becomes a question of utilization and convenience.

    - Cost of rental car:  cost of ownership (depreciation and financing) plus cost of CAR/HTZ opex/g&a (say 20% of revenue) plus gas/parking

    - Cost of Uber:  cost of ownership (should be higher because CAR/HTZ buy in bulk and get more attractive wholesale ABS financing than an Uber driver) plus the Uber driver's salary plus Uber's 25% revenue take plus gas/insurance  

    so it really gets down to utilization.

    But hasn't this always been the same equation for rental cars vs taxis?  These two options have been around forever and the market is clearly segmented   Uber is 't cheaper than taxis, it's just a better customer experience.   Uber is arguably making taxis more accessible so perhaps this convenience aspect leads to share gains vs rental cars

    also i'd add that the rental car companies have become much more sophisticated in leveraging customer loyalty programs to enhance the user experience   Hertz gives Gold status away for free now and I use it and never have to wait in line, you judt go directly to your car.

     

     

     

     

     

     


    SubjectRe: Re: Re: Re: Re: questions
    Entry02/01/2015 11:00 PM
    Memberjso1123

    Rii brings up a great point:  can you analyze car rental in NYC?  Uber penetration is deep/liquid and parking cars here is generally expensive/a pain.  So this would be one of the first markets to feel the impact.  What are you seeing here?   I would think all the LGA/JFK/Newark data on rental car volumes is out there


    Subjectairport access
    Entry02/02/2015 12:49 AM
    Membersocratesplus

    i would find it interesting to know what percentage of airports have rules prohibiting pickups of passengers by non-taxi/limo licensed vehicles.  

    it is my undertanding that most of the uber etc vehicles are not so licensed and are not authorized to make pickups at airports (forgettiing about the enforcement question).  i may be wrong on this.

    but if i am not wrong and a significant number of airports do not prohibit uber etc pickups by non-licensed cars, then i can see the competitive threat. 


    SubjectRe: airport access
    Entry02/02/2015 06:46 AM
    Memberjso1123

    See p. 55 - they go through the mode of transport for originating and departing passengersfor all the NYC airports.

     http://www.panynj.gov/airports/pdf-traffic/ATR2013.pdf

    What you note is that rental cars are only 5% market share.  Taxi/limosine = 40% (to me this is the real Uber addressable market as state earlier given that Uber's cost is equivalent to these two modes but the customer/driver experience is much better).  At 5% in NYC, isn't this a market niche that has already been well established?  These rental cars in NYC have always had to compete w/just getting a taxi and in NYC there are always a ton of taxis.  So there are reasons people get rental cars.  

    I think the New York market is really important to analyze because this is probably the most uber friendly market out there - distances are relatively short for most passengers (working against rental cars), parking is hard (working against rental cars), Uber adoption is already extensive, and taxis are overpriced due to the ridiculous vig the medallion owners take.  You could call the port authority and get a sense of rental car market volumes the last several years and also 2014 (which they haven't published by might have YTD stats)?  I think that would go a long way to confirming the thesis.

     

     

     

     

     


    SubjectClarification and Response to a few Posts
    Entry02/02/2015 09:52 AM
    MemberFletch

    I need to be clear about my thesis here.  Avis is trading at a high multiple that basically assumes that they will have solid growth in the years ahead.  Much of this growth is from Price increases.  As I said in the Idea Description – “Not implying that it will be a 100% substitution of the car rental market, but it will definitely be disruptive and will certainly be a headwind for their revenue”

     

    My point about Uber is that it will be a competitor, not to every single situation, but to MANY types of situations that people use rental cars.  This will be enough for there to be a head wind to revenues and price increase.  Considering the proliferation of Uber and its rising popularity  and considering the big increase in Revenues expected this year at Avis, I think they will have a difficult time making their numbers and thereby justifying their large valuation

     

    Again it will not be a full substitution - To use an extreme example - Someone who flies into SanFran for a vacation to drive down the coast to San Diego, will NEVER EVER think about replacing their rental car with an Uber, the rental car is the experience

     

    On the other hand, the business market (which is 30% of Avis Customer base) will certainly be disrupted.  Many (again not 100% but many) business customers who fly into city X, and have to travel an hour to a company’s headquarter in a suburb, may rent a car because they do not want to deal with starting to call up local car companies to find a ride back.  Enter Uber - now 15 minutes before the meeting ends, you hit a button on your phone and you are ready to go when meeting ends

     

    The point is that there will never be disruption on one extreme, and there will be some disruption along the spectrum of customers that use Rental Cars.  

     

    Rii – on your question whether I have evidence.  The only evidence I have is that Enterprise, which has over 50% market share is worried about it (They actually had a large stake in Lyft, but sold out a few years ago).  When there actually will be hard data evidence of taking market share and disruption, then Uber will already have penetrated the market and the stock will of Avis will be at $35

     

    JSO - Regarding NYC, I actually think it is a terrible example.  The public transportation system and access to taxi’s have always been vast and easy (even before Uber), so the people renting cars are doing it for a reason where Uber will most likely not be a replacement (maybe driving to Cooperstown or the Poconos).

     

    Chuplin – I agree with you the completely, it isn’t just Uber, and all I am looking for is for it to hurt Avis on the Margin.  The proliferation of all of these technology driven car car rental/taxi/sharing companies will all be headwinds

     

     

    Socratesplus – it is irrelevant what airports allow and disallow.  Eventually it will all be worked out and these companies will be allowed everywhere because that is what the consumer wants.  In the meantime, in the Cities that require Uber drivers to have a license, they are licensed


    SubjectRe: Clarification and Response to a few Posts
    Entry02/02/2015 10:02 AM
    Memberjso1123

    I don't agree w/your conclusion on NYC example for reasons I stated, but if you don't like then what are you seeing at SFO in San Francisco?  I'd pull that data and look at car rental trends there, that should be better indicative.  My only point is that you need more evidence that there is real substitution - Uber is deeply penetrated in both these markets and as I laid out there is no debate that Uber (and taxis/limos) are more expensive than rental cars on a per day basis (they have to be for all the reasons I stated, most obviously driver wages) -- so it just gets down to utilization.  As you start, if you are driving very far or making a lot of stops (i.e. high utilization) you rent a car;  if you are just doing a few or going one place and staying put then you take Uber/taxi/limo.  But this really isn't new -- everyone has always had to make this choice and Uber's pricing is in line with taxis so why won't consumers look at it as a taxi substitute?  

    Also I'd pushback on your conclusion that its hard to get a cab or limo service - every business customer (including our firm) generally has an outsourced travel agent (like Amex) that books this stuff.  I don't think most business people show up at a meeting in Oakland and then at the end of the meeting say, "Hey how do I get a taxi back to SFO?"

    I'll see if I can pull the SFO data and maybe we can have a better discussion about the facts around the substitution affect.  It should be seen in SFO in the form of declining rental demand and if its not I wouldn't feel great about your structural short thesis.

     

     

     


    SubjectRe: Re: Clarification and Response to a few Posts
    Entry02/02/2015 10:40 AM
    MemberFletch

    I'll look into the SanFran market, but as i said, i don't really care about the evidence that it is has happened.  I am trying to say that it will be happening and anecdotal evidence of people i talk to is surely strong enough for me - Habit changeing takes time to happen and I don't want to be around when it actually does.  

    Large companies, use travel agents.  My friend who has a small business that sells cookie dough to restuarants and who is on a plane every week does not.  It isnt just about cost (Uber is approximately $1.5 per mile), for business customers (and others) its about productivity.  The full cost of a rental car also is not just the Headline Number.  If you stay at a decent hotel in a city, the cost of parking the car could be as much as the headline cost of the car.  Paying for Gas (most people choose to fill up themselves than pay the ridiculous price per gallon that the car rentals charge).  All the Ancillary items that Rental Car companies charge (I rented a min van for my family in miami a few weeks ago, the headline cost was $208 for the week, in actuality, with paying for gas, total cost was $350 (not including any of the parking fees i paid throughout the trip).  So there is a big difference in the headline cost and the actual cost.  Additionally, companies like Uber, at this point, care more about Volume and disruption than making money.  Their incentives they give out are tremendous to incentivize users to use the product more and more.  Over the next few years, they will sacrifice cost for gains in market share.  That will be the disruption.  With Uber raising money recently at a $40 billion valuation, it is getting people's attention.  I am making the argument that I believe that there WILL be a disruption to the rental car market by all the different car sharing companies and that the investment community isn't ready for it (isn't that what we do here, try as hard as we can to predict the future?).  I do not believe that any data suggests that this is happening yet (as Avis said recently at the Barclays conf, that they are not seeing any impact from Uber etc.  I would venture to guess whoever paid over $1 million for a NYC medallion in 2013 didn't see Uber coming even though it was already there


    SubjectRe: real competition
    Entry02/02/2015 10:54 AM
    Membercrestone

    These are way too small to matter right now. Only operate in a few markets. I've been asking Getaround to come to NYC for years and they have been shut down here by regulators.


    SubjectPrice Increases are not sticking
    Entry06/25/2015 11:08 AM
    MemberFletch

    As expected price increases are not sticking.  Enterprise (the largest player in car rentals) is not playing along with the price increases and has elected to gain market share.

    While the company continues to deny (and even actively presenting evidence) that "car sharing" is not having a material effect on their business - I still maintain that is a headwind for their business.  In my opinion, it doesn't need to have a "material"effect, it just needs to pressure pricing.  With other players (besides Uber/Lyft) entering the broad defined "car sharing" market - like Ford & Peugot just this week - this will (even if only at the fringes) affect the car rental market.

    Either way, now that it has become apparent that the price increases will not materialize this year, the hedgies are running for the exit.

    The  coup de grace will be the fed increasing rates - as explained, every 25bps increase will lower EBITDA by approximately $23 million.......without a requisite increase in top line pricing, their margins will be pressured

     


    SubjectRe: Price Increases are not sticking
    Entry06/25/2015 02:19 PM
    Membermartin92

    What is moving the stock today? Where are you getting your data re:Enterprise? 


    SubjectRe: Re: Author Exit Recommendation
    Entry01/17/2016 02:44 PM
    Memberavahaz

    Thanks Fletch,

    So far the entire downward revision to EPS has been due to FX translation. When do you expect any actual fundamental deterioration in the business to start showing in numbers?


    SubjectRe: Re: Re: Re: Author Exit Recommendation
    Entry01/18/2016 06:19 AM
    Memberavahaz

    Actually, pretty much 100% of the YTD EPS downgrade has been due to FX. 30c of the YTD c.35c EPS downgrade is due to FX impact on the international business and another few cents due to lower truck volume.

    Whilst pricing in NA was lower than intitially anticipated, so were costs. In fact the magnitude by which costs were lower is larger than the magnitude of lower pricing which acutally implies better than expected pricing as the margin expanded more than anticipated. The NA EBITDA margin expanded 120bps in 2015 and segment EBITDA rose 13% y/y. You seem purely focussed on headline pricing and seem to ignore the way this business is structured. The key point here is what margin they earn over the depreciation in the value of a car between when they purchase it and when they sell it. If that margin expands (as it has in 2015) it implies a positive pricing environment. At the start of the year, the market expected higher depreciation costs as residual values were in decline. Therefore, to earn a higher margin higher headline prices were required. However, as residuals started to improve, headline pricing was no longer required to expand margins. This is actually a great environment for car hire because the consumer pays less depsite a de facto price increase.

    Re-your expectation that they will miss the FY EBITDA number, keep in mind that Q4 is the smallest of Q of the year and they already reported $762m in EBITDA YTD so Q4 would have to be really horrible for them to report a sinigficant miss... 

    It's great for you that the stock dropped 50%, but it seems a bit presumptions to claim that your thesis actually played out so far... all that really happened to date is some FX headwinds and a massive de-rating...the jury is still out on whether people ordering taxis via an app rather than over the phone is a structural game changer for the car hire industry


    SubjectRe: Re: Re: Re: Re: Author Exit Recommendation
    Entry01/18/2016 08:03 AM
    Memberzzz007

    Fletch,

    Nice work on this one.  I'm not close enough to this one to weigh in on avahaz's comments, but I do know that it's always important as a public market investor to remember that it's not about picking the prettiest girl at the dance, it's about picking the girl that everybody else thinks is prettiest.  Since you were short, maybe "ugliest" is the better analogy here.  You picked the right dance partner.

    I'm guessing your investors don't really care whether you were "right" or not.  They're just happy to see the sweet P&L you posted on this trade.  Congrats on a good idea with a super solid return.

    zzz


    SubjectRe: Re: Re: Re: Re: Re: Author Exit Recommendation
    Entry01/18/2016 10:36 AM
    Memberavahaz

    Fletch,

    Your response to my comment further confirms my impression of your lack of understanding of this business...but i have to agree with zzz007 that it is better to be lucky than intelligent.

    I never said that they were cuttting costs nor that cost cutting was a sustainable growth strategy. I also didn't say that the stock is down 50% because of FX. Read my comment again...

    I said that headline pricing is a meanignless number. If residual car prices were to start dropping again you can be certain that headline pricing would suddenly start rising. Would you then say that your short thesis failed? If so, it would be the wrong conclusion. What matters is the relationship between pricing and deprecaition costs. If that margin expands, as it has in 2015, then the industry is experiencing positive pricing. If it contracts as it has in other years, then you have negative pricing. If the latter happens outside of a recessionary environment then perhaps (in absence of a better explanation) you could argue that your thesis is playing out, but at the moment the opposite is happening.

    Re-FX, i said FX is the reason earnngs this year fell short of inital expectations. The stock is down because the short thesis has gained lots of popularity. My point was merely to ask whether there was actually any evidence to support this big share price drop and warrant such a low valuation. Over the past 10 years Avis' average fwd P/E was 12.5x (according to my Bloomberg GE function) vs the current 7.2x.

    Lastly, i had no idea that Tiger was involved in Avis and that it has now changed its mind. Is that your proof that the thesis is playing out?


    SubjectRe: Re: Author Exit Recommendation
    Entry01/18/2016 01:39 PM
    Memberzzz007

    Fletch...as I'm sure you recognize, I never stated that it was better to be lucky than intelligent.  You're obviously a lot more intelligent than anybody who was long this stock, since you made money and the longs lost a boatload.  My point was that it's more important to make money than it is to have every element of your thesis "correct".  Academic arguments are for the guys wearing tweed jackets who have trouble making the rent.  I've always given the analyst who tells me he was "right on the fundamentals but wrong on the price" one get-out-of jail-free card, after which I tell him that it's time to start circulating his/her resume.


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Author Exit Recommendation
    Entry01/18/2016 01:41 PM
    MemberMSLM28

    My 2 cents on pricing from my experience.... I rented a car a few weeks ago while visiting Seattle. I booked the day of the trip and it was mind boggling how cheap the rate was. After initially booking a compact car for $9 a day, I was upgraded to a 370Z for $35 after tax. The sales guy mentioned how rates were dropping and they have a ton of cars (guy before me got a 7 series for $50).  Needless to say, I had fun.


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Author Exit Recommendation
    Entry01/18/2016 01:45 PM
    Memberavahaz

    If you look back in time you can see that pricing and deprecation follow each other perfectly every quarter. They are of course dependent of each other. This business is all about making money over the life of car ownership. How can you possible argue with that? Btw, the same counts for an Uber driver...

    I wasn't aware that your thesis was based on the idea that certain hedge funds misunderstood how this business works 6 months ago. If that was the case than you are lucky AND smart!

    My original question here was what are the actual data points that show that business fundamentals are deteriorating and that i don't think the lack of price increases this year is relevant because of the link to lower depreciation. 

    If the business isn't detriorating than this stock appears incredibly cheap on close to 20% fcf yield (and buying back stock agressively).

    i guess 2016 will be a very interesting year for this one...

      Back to top