Avis Budget Upgraded to Outperform - Analyst Blog

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We recently upgraded our long-term recommendation on car rental company Avis Budget Inc. (CAR) to 'Outperform', on account of a host of positives including better-than-expected first-quarter 2012 results, an improved earnings outlook as well as various encouraging developments on the cost and investment fronts.

Sustained focus on productivity and cost containment initiatives along with better travel trends and lower fleet costs drove Avis Budget to post better-than-expected first-quarter 2012 results. The quarterly earnings of 12 cents per share increased over 9% from the prior-year quarter, beating the Zacks Consensus Estimate of a loss of 7 cents per share. Avis Budget registered a 31% jump in net revenues to $1,623 million from $1,235 million in the year-ago quarter, beating the Zacks Consensus Estimate of $1,619 million.

Travel demand across most of its markets remained strong in the first quarter, while it continued to smoothly progress on the integration of the recently acquired Avis Europe business.

Moreover, the company's bottom-line performance has been supported by its cost-cutting initiatives, such as Performance Excellence, and Five-Point Cost- Reduction and Efficiency Improvement Plan. Looking ahead, the company expects incremental cost savings from these initiatives of approximately $45 million in 2012. Further, the company has guided per unit domestic fleet costs to decline along with lower-than-expected non-vehicle depreciation and amortization costs.

Driven by the cost guidance and the projected effect of its long-term cost-saving initiatives, Avis Budget expects fiscal 2012 earnings to be in the range of $2.35 to $2.65 per share, up 42% to 61% from fiscal 2011 level. Full-year total revenue is expected to come in the range of $7.3 - $7.6 billion, reflecting a year-over-year growth of 24% to 29%.

Further, the leading general-use vehicle rental company with a formidable network of more than 10,000 rental locations and 350,000 vehicles follows a core global strategy of partnering with leading travel brands to expand its customer reach while creating additional demand. The company's recent partnership with leading German automobile club Allgemeiner Deutscher Automobil-Club testifies its commitment to its global strategic initiatives, which is based on the value of its brands and its ability to provide synergies to its partners that also benefit their brands and businesses.

Keeping up with its strategy to expand geographically, Avis Budget continues to pro-actively look for strategic acquisitions and alliance opportunities. The acquisition of Avis Europe in October 2011 was an important step in this direction. Currently, the company remains on track with its integration plans for Avis Europe and expects its 2012 results to gain annual synergies of over $35 million, within the first anniversary of the acquisition.

Avis Budget's growth strategy depends on its continuous efforts of introducing new ideas and investments in technology up gradation, which we believe will likely boost the company's performance. Recently, the company has entered into a $14 million deal with I.D. Systems to install virtual car rental technology in over 25,000 vehicles. The technology will permit travelers for reserving, picking up and returning rental vehicles through their smart phones, as well as they will get an automated electronic receipt after the completion of the rental, enabling the company to minimize cost while enhancing profitability.

Avis Budget competes with Hertz Global Holdings Inc. (HTZ), Enterprise Rent-A-Car and Dollar Thrifty Automotive Group Inc. (DTG). On account of host of positives, the company maintains a Zacks #1 Rank, indicating a short-term 'Strong Buy' rating.


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