Digital Platforms And Latin America Urbanization Will Drive Shared Mobility

Key Takeaways

• Emphasis on digital innovation and flexible mobility solutions is boosting customer satisfaction, recurring demand, and supporting margin and revenue growth.
  
• Strategic fleet optimization, industry consolidation, and cost efficiencies are strengthening Localiza's competitive positioning and enabling sustainable margin expansion.
  
• Susceptibility to regulatory changes, competitive pressures, and strategic shifts toward light fleets heighten risks to margins, demand resilience, and long-term revenue sustainability.

Catalysts

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

• Growing adoption and enhancement of digital platforms (e.g., digital pick-up, self-service features, app-based subscription management) are improving customer convenience and satisfaction, supporting higher booking volumes and cost efficiencies, and likely to drive both revenue growth and margin expansion over time.
  
• A generational and economic shift away from car ownership toward usage-based models-evident in Localiza's high subscription and fleet rental growth (up ~20% YoY in light vehicles and subscription)-is fueling recurring, stable demand for Localiza's mobility solutions, helping secure long-term revenue and earnings growth prospects.
  
• Localiza's ongoing optimization and scaling of its fleet-targeting higher-return segments and reducing severe-use and heavy vehicles-combined with continuous cost-cutting initiatives and process integration, are supporting improvements in utilization rates and operating margins, with further margin expansion potential as systems integration and synergies mature.
  
• The ongoing consolidation of the industry (integration of Locamerica, merger of 14 entities) is giving Localiza better cost leverage and a stronger negotiating position with OEMs and suppliers, which is lowering input costs and supporting sustainable net margin gains.
  
• Secular trends of urbanization and the growing importance of flexible, shared mobility in Latin America underpin sustained volume growth in core rental and subscription services, with Localiza's strong competitive position and brand allowing it to capture a disproportionate share of this secular demand, supporting long-term revenue and cash flow growth.

Localiza Rent a Car Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Localiza Rent a Car's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 11.5% in 3 years time.
• Analysts expect earnings to reach R$6.4 billion (and earnings per share of R$6.17) by about August 2028, up from R$2.3 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 16.4x on those 2028 earnings, up from 15.8x today. This future PE is greater than the current PE for the BR Transportation industry at 8.8x.
• Analysts expect the number of shares outstanding to decline by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.98%, as per the Simply Wall St company report.

Localiza Rent a Car Future Earnings Per Share Growth

Risks

• The announced R$800 million to R$1 billion impairment due to the government's IPI tax reduction on cars highlights Localiza's vulnerability to governmental regulation and market swings in vehicle prices; ongoing regulatory changes or further pricing shocks could increase depreciation rates and materially compress net margins and future earnings.
  
• Localiza reported that the volume of cars sold in its Seminovos business was flat year-over-year due to restrictive credit conditions; prolonged tight credit environments or declining used car demand could stagnate or reverse revenue growth and put pressure on earnings from asset disposals.
  
• Management has acknowledged that rental day volumes decreased year-over-year due to fleet reductions, and that further price increases in sensitive segments like Zarp (gig/ride-hailing) are already showing signs of demand elasticity; sustained price hikes could drive volume losses, ultimately dampening top-line revenue growth.
  
• While recent quarters benefited from cost efficiency and healthy competitive dynamics, intense domestic competition and the risk of aggressive pricing from competitors-especially in Fleet Rental-could erode Localiza's pricing power and limit its ability to sustain margin expansion over the long term.
  
• The company is gradually reducing exposure to heavy rental and "severe use" segments to focus on higher-return "light fleets" and subscription, but this strategic shift reduces diversification and could leave Localiza more exposed to structural changes, such as rapid mobility-as-a-service adoption or accelerated EV penetration, that threaten traditional fleet utilization and revenue streams.

Valuation

• The analysts have a consensus price target of R$53.873 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$65.0, and the most bearish reporting a price target of just R$39.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$55.8 billion, earnings will come to R$6.4 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 24.0%.
  
• Given the current share price of R$34.8, the analyst price target of R$53.87 is 35.4% 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.