Bull Of The Day: Avis Budget Group (CAR) – July 11, 2019

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Avis Budget Group (CAR Free Report) , a leading global car rental company, has positioned itself as a buy. It’s trading at multiples that are signaling a value buy with expected EPS appreciation that mirrors a growth stock. Sell-side analysts are becoming progressively optimistic about the future of this business, raising EPS estimates for the next two years and propelling this stock into a Zacks Rank #1 (Strong Buy).

Avis Budget Group operates in roughly 180 countries with a fleet of almost 650,000 vehicles. Avis, Budget, and Zipcar are some of the most recognized car rental brands in the world, all operating under the umbrella of this firm. Avis and Budget make up 92% of Avis Budget Group’s top-line, with the growing Zipcar brand driving most of the remaining 8%.

Avis Budget Group has a diverse portfolio of brands that meet a wide variety of customer needs. Avis is targeted at corporate and upscale leisure travelers, while Budget provides mid-tier options for the more judicious travelers. Zipcar is targeted at the millennial consumer who is attracted to ease and convenience, which Zipcar is able to satisfy through its easy to use app and its readily accessible cars.

Domestic sales makeup 68% of the firm’s total top-line and drive its profitability. Domestic revenues only grew 1% in 2018, but CAR’s EBITDA saw 15% growth primarily driven by per-unit fleet cost. Per-unit cost decreases should continue to expand margins as the firm realizes further economies of scale with the company’s expected expansion in the coming years.

The international side of the business, making up 32% of the top-line, is driving a good portion of the firm overall sales growth. Avis Budget Group boasted a 7% top-line appreciation in 2018, but this sizable growth comes at a cost.  Increased marketing costs combined with maintenance and damage costs have driven down margins over the past year. I expect that as this side of the business matures and develops consistent profitability will follow.

Valuation

CAR is up almost 55% since the beginning of the year and is still trading at reasonable multiples. Considering that 98% of the business is being funded by debt, EV/EBITDA is a useful metric to use. This multiple is helpful when valuing a heavily leveraged firm. CAR is currently trading at a 6.2x EV/EBITDA, which is below the industry average. CAR is being valued at a 9.5x TTM P/E, on the lowest end of its 5-year trend having traded as high as 28x and as low as 8x.

Avis Budget Group, Inc. PE Ratio (TTM)

Avis Budget Group, Inc. PE Ratio (TTM)

Avis Budget Group, Inc. pe-ratio-ttm | Avis Budget Group, Inc. Quote

Avis Budget Group is estimated to have modest revenue growth over the next two year but expected to exhibit double-digit bottom-line appreciation.

Take Away

Avis Budget Group is putting its best foot forward in its attempt to remain competitive in the fast-changing transportation space. CAR is teaming up with innovative leaders like Lyft (LYFT Free Report) and Google’s (GOOGL Free Report) Waymo to maintain their competitive edge.

CAR’s exciting growth expectations and its equitable multiples combined with increasingly optimistic analyst expectations indicate to me that this stock is a solid buy. Before putting a position on consider the massive amount of debt financing that could add to this stock’s risk and volatility.

Look for analyst estimates to be confirmed or rejected in the upcoming earnings release on August 8th.

 

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2019-07-11 10:00:00

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