Avis Budget Downgraded, Still Best Rental Car Play Available

Credit Suisse has downgraded Avis Budget Group Inc. CAR to Neutral from Outperform on lackluster growth environment implied in the company’s outlook. However, the brokerage still calls the stock the preferred play in rental cars.

Review

The downgrade comes after the rental car company’s fourth-quarter EPS of $0.15 missed the Street's $0.17 estimate, primarily driven by weaker volume, pricing, and negative FX. Revenue of $1.88 billion also missed the Street view of $1.96 billion. Americas volume declined 1 percent, the first decline since the recession, while Int'l volumes grew 3 percent.

Anjaneya Singh was surprised over Avis Budget’s negative volume growth in the quarter. He was expecting that volume growth could come in higher than the 1–2 percent guidance range for Americas, given the recent optimism around faster GDP growth in 2017.

For FY 2017, the company guided to revenue of $8.8 billion - $8.95 billion and EPS of $3.05–$3.75 (vs. the Street at $9 billion/$3.45).

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Analyst's Take

Meanwhile, Singh remains wary on the lack of visibility in the rental car business despite the company's 0–3 percent fleet cost guidance (Americas) beat his 4.5 percent estimate.

“While we acknowledge that volume guidance could potentially prove conservative, when looking at capacity and RevPAR growth expectations from airlines and hotels, respectively, we see the incremental upside as being immaterial,” Singh added.

At the same time, Singh sees the downside to CAR shares being limited by strong repurchases, making the risk/reward as relatively balanced.

The analyst cut his 2017 EPS estimate to $3.33 from $3.63 and target price to $38 from $44.

At last check, shares of Avis Budget fell 3.53 percent to $34.50.