Latin America Volatility Will Pressure Profits Though Margin Efforts Ease

Key Takeaways

• Heavy dependence on Brazil and traditional rental models increases vulnerability to economic shifts, currency risks, and evolving mobility preferences like ride-sharing.
  
• Cost efficiency and digital advances support margins, but rising compliance, fleet, and regulatory costs may limit earnings and growth flexibility over time.
  
• Sustained margin pressure, regulatory risks, demand sensitivity, and heavy reliance on core segments could threaten long-term profitability if market or macroeconomic conditions worsen.

Catalysts

Engages in car and fleet rental business in Brazil and internationally.

• While Localiza is benefiting from ongoing urbanization and a rising middle class in Latin America which supports increasing demand for mobility services and higher rental penetration, the company's heavy reliance on Brazil and certain regional markets leaves future revenue exposed to economic volatility and potential currency fluctuations.
  
• Despite successfully executing digital transformation initiatives such as app-based mobility features and higher digital pickup penetration, rapid technological change and the accelerating adoption of ride-sharing and micro-mobility platforms could erode traditional car rental demand in the long term, potentially dampening fleet utilization rates and growth in customer base.
  
• The company's continued progress in cost efficiency, system integration, and focus on higher-return segments is likely to support margin expansion, but rising fleet maintenance and depreciation costs-especially in the environment of slow fleet renewal and evolving vehicle mix-could squeeze net margins over time.
  
• Although Localiza's portfolio optimization and focus on light fleet and subscription segments have driven high revenue growth and improved cross-sell opportunities, the slowdown in fleet purchases and exposure to regulatory changes, such as new tax policies and environmental incentives, may lead to increased compliance costs or limit flexibility, ultimately constraining long-term earnings growth.
  
• While Localiza benefits from strong relationships with OEMs that currently underpin favorable fleet acquisition costs and industry consolidation advantages, potential direct entry of vehicle manufacturers into rental and mobility services threatens to weaken Localiza's pricing power and could erode gross profit margins in the future.

Localiza Rent a Car Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Localiza Rent a Car compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Localiza Rent a Car's revenue will grow by 8.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.9% today to 10.3% in 3 years time.
• The bearish analysts expect earnings to reach R$5.2 billion (and earnings per share of R$4.97) by about August 2028, up from R$2.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, down from 15.5x today. This future PE is greater than the current PE for the BR Transportation industry at 8.7x.
• Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 24.08%, as per the Simply Wall St company report.

Localiza Rent a Car Future Earnings Per Share Growth

Risks

• The company is experiencing a structural increase in depreciation expenses, with the marginal car depreciating at a higher rate than the average and no expectation for this trend to reverse, which will put long-term pressure on net margins and earnings.
  
• The business is highly exposed to regulatory and tax changes, as seen with the recent R$800 million to R$1 billion write-down triggered by the IPI tax reduction, demonstrating how sudden shifts in policy can have material negative impacts on book values and future profits.
  
• While Localiza reports strong cost controls and margin improvements, the company acknowledges that aggressive price increases (especially in the Zarp/Uber segment) are leading to noticeable demand elasticity, which could constrain future revenue growth and overall fleet utilization if customers become increasingly price-sensitive.
  
• The decision to reduce exposure to heavy vehicles and specialty segments means the company is concentrating more heavily on light vehicles and subscriptions-any market disruption, competitive pressure, or secular shift to alternative mobility solutions in these core areas would disproportionately impact Localiza's future revenues and profit stability.
  
• The company's ability to maintain or improve its return on invested capital (ROIC) spread relies on ongoing disciplined capital allocation and favorable macro conditions; continued or future increases in interest rates, rising fleet costs, or a slowdown in Brazil's economic activity could narrow spreads and limit earnings growth over the long term.

Valuation

• The assumed bearish price target for Localiza Rent a Car is R$39.45, which represents two standard deviations below the consensus price target of R$52.94. This valuation is based on what can be assumed as the expectations of Localiza Rent a Car's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$65.0, and the most bearish reporting a price target of just R$39.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$50.4 billion, earnings will come to R$5.2 billion, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 24.1%.
  
• Given the current share price of R$34.22, the bearish analyst price target of R$39.45 is 13.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.