Completion of Investments
Avis Budget Group, Inc.NASDAQ:CAR) stock has fallen over 17% in the past 12 months, and the question arises whether CAR will continue to decline in valuation. I think this will continue because rising interest rates are putting pressure on Americans’ everyday spending power. With less capital available it leaves less capital available for rental car companies like CAR to access. Additionally, the share price has been incredibly volatile for the company and the industry is seeing a steady shift towards car sharing services instead of rentals. CAR will likely need to invest heavily to maintain a strong position here and keep up with competitors. I think the next few quarters will continue to see an increase in long-term debt and that could put pressure on the bottom line as interest expense get up CAR is a larger business with TTM revenue over $12 billion, putting it at sub-0.6 p/s on a FWD basis. I still think it’s quite risky as the disruption caused by car sharing services could affect future results for CAR unless their Zipcar asset grows rapidly and offsets losses in other markets. Because of these uncertainties, I’m more comfortable rating CAR at Hold for now, and potentially a Buy, depending on how the industry evolves. It has to be said that investors are still getting a lot of value from holding the stock as CAR continues to quite aggressively buy shares right now.
Based in New Jersey, CAR operates in the US car rental industry, maintaining a strong fleet of approximately 19,000 vehicles. The company prides itself on its diverse portfolio of well-known brands, such as Avis Car Rental, Budget Rent a Car, Payless Car Rental and Zipcar. This broad group of brands positions CAR as a leading force in the rental car market, catering to a wide range of customer preferences and needs.
CAR continues to have one strong presence in the rental car service industry, but is under a lot of pressure from companies like Ryder System, Inc.R) and Hertz Global Holdings, Inc.HTZ). The company saw a hit in the bottom line limits in recent years, but the market and industry still face many uncertainties and risks. CAR has exposure to this market thanks to its ownership of Zipcar, but in my opinion it needs to invest significantly here to gain market share and keep it as well.
The car rental sector is currently undergoing a significant transformation, shaped primarily by the growth of car sharing services. Car sharing represents a departure from the traditional car rental model, allowing consumers to rent vehicles for shorter durations and from different locations, often sourced from individuals or smaller operators. of car sharing market in the US alone is expected to grow by around 13.8% annually through 2028, presenting a massive opportunity for companies to tap into and capitalize on growing demand.
This change has introduced a new level of convenience for consumers, especially those who do not require a car regularly. Car sharing offers a flexible solution, enabling individuals to access vehicles when needed without the financial commitments associated with full ownership. This transformative trend not only reflects changing consumer preferences, but also has fundamental implications for the dynamics of the rental car market. As the industry adapts to these evolving patterns, companies like CAR are navigating this new terrain to meet the new needs of today’s consumers. THERE there is no shortage of companies trying to enter this market and I think it will be difficult for CAR to hold its margins because of the large amount of capital that is likely to be required to maintain a strong position here. It could be a race to the bottom as more companies come in and are trying to undercut each other. I don’t like that scenario and it’s a major reason why I can’t rate the business as a buy right now.
The last earnings ratio from the company has shown a slight increase in income, but not more than 1% even. Higher interest rates in the US and internationally are putting pressure on people’s ability to spend, and the services CAR is offering become a lower priority for many people. Rates also seem to have affected the CAR and the bottom line decreased by 39% YoY, which has given way to the high amount of short interest currently floating around the company.
Depreciation of vehicles for the company as well as rental fees were a big reason. This went from $134 million in the third quarter of 2022 to $517 million in the third quarter of 2023. Vehicle interest also increased by a further $100 million, resulting in total spending increasing by over $600 million. dollars, while the company’s revenue remained unchanged.
Looking more closely at Zipcar as a brand and asset for the company, it is included in other revenue for the company and the last quarter showed a trend showing where it is down. I think that. the growth opportunity for Zipcar exists, but the current market climate may not support any rapid growth. At the valuation we’ll get to below, I still think the hold is reasonable as the risks seem to be calculated right now on it.
America continues to be the company’s biggest market right now, and rental days here grew by 7% year-on-year, which was a welcome positive sign last quarter. However, revenue per day decreased, indicating that the pricing environment may not be as solid for CAR and competition is still fierce. Furthermore, the utilization rate for the company decreased to 70.3%. This has also been evident in the company’s ROA, which peaked at over 10% in the last quarter of 2022 and is now below 6%. I think further depreciation here will be evident and that means a lower rating is justified and a buy rating is also difficult to make.
One of CAR’s largest and peer companies is HTZ. When looking at the valuation of these companies, they trade very low on p/s ratio, CAR at 0.56 and HTZ at 0.27. I think a major reason for CAR trading at a slightly higher multiple has to do with their tighter margins compared to HTZ. Gross margins are at 41% and over the past 10 years, the top line has grown to 4.44% CAGR. Moving on to HTZ, they have gross margins at 25% and in the last decade have actually seen it pull back at the top and have seen an average decline of 1.33% during the same period. I think this shows that maybe CAR could be the best growth opportunity, but as I’ve said before, not to a point where it’s compelling enough to make a buy.
As a growing number of companies delve into the car-sharing industry, there is an obvious risk of a “race to the bottom”. This scenario involves fierce competition where companies try to outbid each other by lowering prices to secure a larger market share. This intensified competition could result in thinner profit margins for companies, including CAR, compared to what is currently reflected in their valuation.
Additionally, the continued threat of higher interest rates poses an additional challenge to profitability. whether Interest rates continue to rise and remain elevated for an extended period, it is conceivable that CAR’s valuation could come under downward pressure, potentially leading to a cut to its trading multiple. Higher interest rates often lead to more pressure on the bottom line as interest expenses rise. The evolving landscape of the car sharing industry, coupled with economic factors such as interest rates, underscores the need for companies to effectively strategize to maintain a competitive edge and financial resilience in the face of these challenges.
The car rental industry is quite interesting to follow as in many ways it is a good reflection of what consumer spending power looks like. Demand for CAR has not appreciated much as revenues remained largely flat on the year. Additionally, higher interest rates and large depreciation of vehicles and other assets have helped 39% annual decline in net income as seen in the last income statement. I think CAR is also at a point where it needs to allocate a lot of capital to Zipcar to gain market share in the growing car sharing industry, which is disrupting the more traditional rental car industry. At the moment, the results are trending the wrong way, but I think the risks are ripe with the company’s current valuation and a stable rating can be justified here.