Fleet Rejuvenation And Pricing Adjustments Will Improve Future Prospects

Key Takeaways

• Localiza's pricing strategy and efficient cost management are likely to improve revenue growth and operating margins.
  
• Optimizing the portfolio and maintaining fixed interest debt should enhance net margins and support future earnings stability.
  
• Rising interest rates, used car price fluctuations, and competitive market dynamics threaten Localiza Rent a Car's margins, profits, and operational efficiency.

Catalysts

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

• Localiza's strategy to adjust rental pricing and restore return levels is likely to impact future revenue growth positively, as it suggests an ongoing ability to transfer pricing increases to customers in both the Car Rental and Fleet Rental divisions.
  
• The commitment to optimizing the portfolio, along with disciplined capital allocation, is expected to enhance net margins by focusing on higher-return segments and reducing exposure to less profitable contracts.
  
• Efficient cost management and increased fleet productivity improvements, such as centralizing car preparation and rejuvenating the fleet, are anticipated to lead to a gradual increase in operating margins, contributing positively to future earnings.
  
• The gradual rejuvenation of the fleet, alongside an expanded sales capacity in the Seminovos division and an effort to accelerate wholesale sales, should lead to an improved sales mix, which can impact net income positively over time by stabilizing the average price of cars sold.
  
• The strategic choice to maintain a high percentage of net debt at fixed interest rates ensures the company's resilience against rising interest rates, forecasting better debt ratios and supporting future cash flow generation, thus potentially boosting earnings.

Localiza Rent a Car Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Localiza Rent a Car's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 10.7% in 3 years time.
• Analysts expect earnings to reach R$5.9 billion (and earnings per share of R$5.48) by about January 2028, up from R$1.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, up from 20.3x today. This future PE is lower than the current PE for the BR Transportation industry at 28.5x.
• Analysts expect the number of shares outstanding to grow 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 22.04%, as per the Simply Wall St company report.

Localiza Rent a Car Future Earnings Per Share Growth

Risks

• Rising interest rates pose a risk to financing costs and impact demand, potentially affecting net margins and revenue growth.
  
• A potential decrease in used car prices could result in higher depreciation expenses, negatively impacting net income.
  
• A substantial part of the debt is at a fixed interest rate, which may limit flexibility in managing financing costs in a changing interest rate environment, affecting future earnings.
  
• The competitive dynamics in the car rental market could impose challenges in maintaining pricing power, impacting revenue and profit margins.
  
• Potential challenges in the supply chain for new vehicles could affect fleet renewal processes, impacting operational efficiency and future revenue growth.

Valuation

• The analysts have a consensus price target of R$63.89 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$44.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$55.3 billion, earnings will come to R$5.9 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 22.0%.
• Given the current share price of R$32.2, the analyst's price target of R$63.89 is 49.6% 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.