ZIP Zipcar, Inc. (MM)

Leading global car rental company, Avis Budget Group Inc. (CAR), posted stronger-than-expected fourth-quarter 2012 adjusted loss per share of 7 cents, faring better than the Zacks Consensus Estimate of loss of 8 cents and improving 50% from a loss of 14 cents delivered in the prior-year quarter on the back of solid top-line growth along with improved margins.

On a reported basis, including one-time items, the company’s loss per share came in at 43 cents in the reported quarter compared with a loss of $1.62 in the comparable year-ago quarter.

As per Avis Budget, overall travel demand remained strong in the quarter under review, while it continued to progress smoothly owing to the integration of its Avis Europe and Apex Car Rentals businesses.

Quarter in Detail

Avis Budget’s net revenue increased 4% to $1.698 billion from $1.630 billion in fourth-quarter 2011, beating the Zacks Consensus Estimate of $1.641 billion. The year-over-year revenue growth was primarily driven by a 6% rise in rental day volume, which was partially offset by a 2% decline in pricing.

Driven by solid top-line performance, Avis Budget’s adjusted EBITDA for the quarter surged 22% to $78 million from $64 million in the comparable year-ago quarter. Consequently, Adjusted EBITDA margin for the quarter expanded 66 basis points to 4.6%.

Segment Performance

North American car rental revenues grew 5% to $1.060 billion in the fourth quarter, primarily attributable to a 5% volume expansion partially offset by decline in prices by less than 1%. Further, adjusted EBITDA jumped nearly threefold to $47 million compared with $16 million in the year-ago quarter, primarily benefiting from higher revenues along with lower per-unit fleet costs and vehicle interest costs.

International car rental revenues came in at $550 million, rising 3% from the year-ago quarter, benefiting mainly from the Avis Europe acquisition and addition of Apex Car Rentals. A 6% increase in volume drove the year-over-year growth, but was partially offset by a 5% fall in pricing. However, adjusted EBITDA for the segment decreased 35% to $24 million, primarily due to increased restructuring costs.

Revenues at Truck Rental inched up 1% to $87 million, as benefits from a 2% hike in volume along with a 5% increase in ancillary revenues were partially offset by a dip of 4% in pricing. The segment’s adjusted EBITDA plummeted $8 million to $1 million due to increased fleet and fleet maintenance expenses.

Fiscal 2012, in Brief

Avis Budget’s revenues for 2012 increased 25% to $7.357 billion primarily due to the acquisition of Avis Europe in October 2011. The year-over-year revenue growth was primarily driven by a 26% rise in rental days and a 33% rise in ancillary revenues, which were partially offset by a 3% decline in pricing.

Driven by solid top-line growth along with improved margins, Avis Budget’s adjusted earnings increased 47% year over year to $2.43 per share and beat the Zacks Consensus Estimate of $2.41.

Balance Sheet

Avis Budget ended the fiscal with cash and cash equivalents of $606 million and total corporate debt of $2.905 billion. At the end of year, the company’s shareholder’s equity stood at $757 million.

Looking Ahead

Avis Budget expects per-unit domestic fleet costs to increase in the range of 15%–20% to $275–$290 per month in 2013. The company’s non-vehicle depreciation and amortization costs are expected to be about $125–$130 million and net interest expenses are anticipated to range between $230 million and $235 million in 2013, $30 to $35 million lower from the 2012 level.

The company’s effective tax rate in 2013 is expected to be in the range of 37%–38% on an adjusted basis, while diluted shares outstanding are projected to be approximately 120 million.

Avis Budget is continuing with its efforts to reduce costs while enhancing productivity through its Performance Excellence initiative as well as five-point cost-reduction and efficiency improvement plan. The company expects its cost-saving initiatives to provide incremental savings of over $50 million in 2013. In 2012, Avis Budget saved $50 million through this initiative.

Further, the company now expects full-year 2013 total revenue to come in between $7.6 billion and $7.8 billion. Adjusted EBITDA is anticipated to be in the range of $725–$825 million in 2013. Consequently, the adjusted pre-tax income is anticipated to be in the range of $360–$470 million.

Based on the above expectations, the company projects adjusted earnings to be in the range of $1.90–$2.45 per share in 2013.

Asset Backed Bond Offering

In a separate story, Avis Budget announced that Avis Budget Car Rental Funding (AESOP) LLC, its wholly-owned subsidiary, has closed its offering of $750 million asset-backed bonds, carrying an annual interest rate of 2.0%, which is the lowest in the company’s history.

The proceeds from the offering will be used to refinance the outstanding vehicle debt maturing in 2013 along with the utilization of some funds during the peak summer fleet needs in 2013.

Borrowing costs have gone down significantly, marking a record low, and in turn, facilitating the companies to obtain easy financing at compelling prices. Corporate bonds are in high demand as U.S. treasuries are yielding low rates, driving investors toward bonds issued by the fundamentally sound companies.

Such moves are quite obvious as the companies cannot take the pressure of paying higher rates for long at a time when debts can be issued with lower coupon rates.

Our Recommendation

Avis follows a core global strategy of partnering with leading travel brands to expand its customer reach while creating additional demand.

Moreover, in order to expand its geographical presence, the company is pro-actively looking for strategic acquisitions and alliances to enhance its growth opportunities. The acquisitions of Avis Europe and Apex Car Rentals are the major steps taken by the company to enhance its operational foothold in global markets.

Further, we believe that the company’s recent offer of $500 million for acquiring Zipcar, Inc. (ZIP) will definitely boost its top and bottom line. This strategic move will facilitate the company to expand its offerings from car rental to car sharing and compete with rivals United Rentals Inc. (URI) and Hertz Global Holdings Inc. (HTZ), which has its own car sharing service, Hertz On Demand.

Currently, Avis Budget carries a Zacks Rank #3 (Hold), as we remain slightly cautious on the stock due to prevailing weakness in the European economy and a possible rise in fleet costs in North America in 2013, which may adversely affect its margins.

 
AVIS BUDGET GRP (CAR): Free Stock Analysis Report
 
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ZIPCAR INC (ZIP): Free Stock Analysis Report
 
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