Expanding Seminovos Division And Digital Initiatives Will Boost Fleet Renewal And Customer Satisfaction In 2025

Key Takeaways

• Efficiency improvements and cost reductions aim to enhance net margins and profitability, supporting the company's financial health.
  
• Strategic focus on profitable segments and customer experience differentiation could boost earnings growth and market share expansion.
  
• Economic challenges, credit limitations, and fleet management risks could negatively impact revenue growth and profitability due to higher costs and decreased consumer demand.

Catalysts

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

• Localiza plans to scale up the Seminovos division, which is expected to enhance fleet renewal and contribute positively to the improvement of sales volumes and net revenue growth in 2025. This is likely to impact revenue and earnings positively.
  
• The company intends to continue adjusting rental prices, ensuring that rental revenue reflects the rise in interest rates. This will help maintain or grow net margins and profitability.
  
• Focus on efficiency, cost reduction, and productivity improvements is expected to help the company manage expenses better, potentially increasing net margins and overall profitability.
  
• Localiza's strategy to optimize the segment portfolio by concentrating on more profitable categories is anticipated to enhance return on invested capital (ROIC) spread, which could support earnings growth.
  
• Expansion of customer experience initiatives, including a 100% digital pickup strategy and mobile app enhancement, is likely to drive differentiation and customer satisfaction, supporting revenue growth and market share expansion.

Localiza Rent a Car Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Localiza Rent a Car's revenue will grow by 13.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 10.3% in 3 years time.
• Analysts expect earnings to reach R$5.6 billion (and earnings per share of R$5.3) by about March 2028, up from R$1.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$6.6 billion in earnings, and the most bearish expecting R$4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, down from 19.1x today. This future PE is greater than the current PE for the BR Transportation industry at 7.2x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.56%, as per the Simply Wall St company report.

Localiza Rent a Car Future Earnings Per Share Growth

Risks

• The economic scenario in 2025 is expected to feature rising interest rates, potential slowdowns in economic activity, and reduced credit availability, which could negatively affect revenue growth and net margins by increasing financing costs and decreasing consumer demand.
  
• Limited credit and worsened affordability for consumers are anticipated, reducing consumer demand and potentially impacting earnings from car sales and fleet rentals.
  
• The company faces pressure to re-establish rental prices to maintain profitability, which could impact revenue growth if customers are resistant to price increases.
  
• Delays in the fleet rejuvenation process due to potential credit restrictions could impact the sale of cars, affecting both revenue and cash flow generation negatively.
  
• The fleet management division shows a potential risk as contracts in the lower profitability segment (i.e., severe use segments like heavy vehicles) have led to an increase in bad debt expenses, potentially impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of R$54.569 for Localiza Rent a Car based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$89.0, and the most bearish reporting a price target of just R$37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$54.7 billion, earnings will come to R$5.6 billion, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 22.6%.
• Given the current share price of R$32.89, the analyst price target of R$54.57 is 39.7% 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.