Fleet Rightsizing And Critical Partnerships Propel Growth Amid Margin And Earnings Pressure Concerns

Key Takeaways

• Avis Budget Group's strategic focus on fleet optimization and proprietary pricing systems indicates a robust approach towards enhancing profitability and revenue growth.
  
• The company's investments in technology and strategic partnerships aim to reduce costs and increase brand visibility, potentially fostering long-term revenue enhancement.
  
• Reliance on fleet sales, nonrecurring gains, and uncertainties in future financial projections may pose risks to the company's earnings and profit margins.

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's focus on fleet rightsizing, by selling a record number of vehicles, prepares the company for improved utilization and pricing benefits expected to positively impact future revenue and margins.
  
• The company's strategy to prioritize price over volume, employing a proprietary demand fleet pricing system, aims at enhancing price optimization and margin benefits, indicating a positive outlook on revenue growth and profitability.
  
• Ongoing model year 2025 fleet negotiations signaling lower acquisition costs compared to recent years could lead to reduced holding costs, positively affecting future net margins and earnings.
  
• Investments in technology and operational efficiencies, such as analytics around in-life vehicle costs and process enhancements, are expected to reduce operating and SG&A expenses, improving overall cost structure and profitability.
  
• The extension of a multi-year partnership with the PGA Tour and the association with PGA Tour winner, Xander Schauffele, as Avis ambassador, could enhance brand visibility and customer base, potentially driving revenue growth.

Assumptions

• Analysts are assuming Avis Budget Group's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.6% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $360.1 million (and earnings per share of $10.12) by about September 2027, down from $785.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2027 earnings, up from 3.1x today. This future PE is lower than the current PE for the US Transportation industry at 28.3x.
• Analysts expect the number of shares outstanding to decline by 7.94% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• The company's reliance on selling a significant portion of its fleet to adjust utilization rates, leading to a potential risk in asset turnover inefficiency which could negatively influence net margins and asset utilization metrics.
  
• The existence of nonrecurring fleet gains and higher vehicle interest in previous periods poses a risk to consistent financial performance, potentially impacting earnings due to the absence of these one-time benefits and elevated interest expenses.
  
• The forward-looking statement acknowledges substantial uncertainties and assumptions that could cause actual financial performance to differ materially, indicating potential risks to revenue, net margins, or earnings projections.
  
• The impact of increased operating and SG&A expenses, although slightly mitigated through operational efficiencies, indicates potential pressure on profit margins due to inflationary pressures and increased costs.
  
• Anticipation of significantly lower holding costs for model year 2025 fleet purchases suggests potential risk if these expected reductions do not materialize or if vehicle depreciation rates do not normalize as expected, impacting net income and cash flow.

Valuation

• The analysts have a consensus price target of $132.62 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 $175.0, 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 $12.7 billion, earnings will come to $360.1 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $69.16, the analyst's price target of $132.62 is 47.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.