Model Year 2025 Vehicles And Tech Integration Will Improve Operational Efficiency

Key Takeaways

• Avis Budget Group's transition to model year 2025 vehicles and fleet discipline aims to enhance profitability and boost net margins.
  
• Expanding the international rental business and tech integrations could drive revenue growth and operational efficiency, improving net margins and profitability.
  
• High vehicle costs and increased competition could limit profit growth, while focusing on high-margin business and external disruptions may impact overall revenue stability.

Catalysts

Provides car and truck rentals, car sharing, and ancillary products and services to businesses and consumers in the Americas, Europe, the Middle East and Africa, Asia, and Australasia.

• Avis Budget Group anticipates lower fleet holding costs as they transition to model year 2025 vehicles, due to more affordable purchase prices, which will enhance future profitability and improve net margins.
  
• The company plans to maintain fleet discipline, ensuring higher vehicle utilization and optimal pricing, which could drive an increase in revenue per rental day and boost overall earnings.
  
• Avis Budget Group is expanding its higher-margin international inbound and cross-border rental business, leveraging advanced bookings and longer rental durations, which could increase revenue.
  
• The integration of technological improvements, such as a new customer app and enhanced demand fleet pricing systems, is expected to drive revenue growth and improve operational efficiencies, positively impacting net margins.
  
• Potential realization of economies of scale and increased productivity through pilot digital tools for vehicle disposition could reduce operational costs, further enhancing net margins and profitability.

Avis Budget Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avis Budget Group's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $426.3 million (and earnings per share of $13.25) by about December 2027, up from $396.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $247.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2027 earnings, up from 7.9x today. This future PE is lower than the current PE for the US Transportation industry at 28.0x.
• Analysts expect the number of shares outstanding to decline by 2.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Avis Budget Group Future Earnings Per Share Growth

Risks

• The company faces challenges due to high vehicle interest and inflated fleet costs, which could lead to decreased net margins and constrain profit growth.
  
• The decision to prioritize high-margin business over volume could result in lower overall rental days, potentially impacting overall revenues.
  
• A decrease in price during the third quarter and anticipated flattening of international pricing suggests potential difficulty in maintaining revenue per day, affecting earnings.
  
• The unpredictable impact of severe weather events like hurricanes and potential disruptions from national elections could lead to volatility in rental demand, negatively impacting revenue forecasts.
  
• Increased competition within the rental car industry and evolving market developments, such as autonomous vehicles, pose potential risks to market share and long-term revenue growth.

Valuation

• The analysts have a consensus price target of $123.5 for Avis Budget Group 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 $150.0, and the most bearish reporting a price target of just $95.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.4 billion, earnings will come to $426.3 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 10.9%.
• Given the current share price of $89.17, the analyst's price target of $123.5 is 27.8% 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.