Leading global car rental company, Avis Budget Group Inc. (CAR) posted better-than-expected second-quarter 2014 results. The results benefited from strong volume growth and improved pricing for both leisure and commercial travels in North America, coupled with the company's focus on speeding up growth in its most profitable channels.
Based on the robust second-quarter results, the shares of this Zacks Rank #2 (Buy) company rose 4.2% during the after-hours trading yesterday. The company remained focused on its strategy of growing its highly profitable customer segments and channels through acquisitions, which are now yielding results.
Second-quarter 2014 adjusted earnings per share of 68 cents grew 36% from the prior-year earnings and surpassed the Zacks Consensus Estimate of 63 cents.
On a reported basis, including certain one-time items, the company reported earnings per share of 24 cents in the second quarter, contrary to a loss of 26 cents per share in the year-ago quarter.
Avis Budget's net revenue increased 10% year over year to $2,194 million in the quarter and surpassed the Zacks Consensus Estimate of $2,140 million. Revenue growth was primarily driven by 8% rise in rental days and improved pricing in North America. Not considering the $31 million contribution from Payless, acquired in Jun 2013, and the currency translation effects, revenue grew 10% and pricing in North America increased 5% year over year.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter increased 19% to $213 million also driven by higher rental days and better pricing in North America. Payless contributed $5 million to adjusted EBITDA.
Segment Performance
North American car rental revenues grew 12% year over year to $1,427 million in the quarter, primarily attributable to a 5% volume expansion and 4% rise in pricing, excluding Payless. Adjusted EBITDA reflected a substantial 37% growth to $157 million, on account of higher volume and pricing, partly offset by a 1% rise in per-unit fleet costs.
International car rental revenues came in at $667 million, up 7% from the year-ago quarter, benefiting mainly from a 2% rise in rental days and 6% growth in total revenue per rental day. Adjusted EBITDA for the segment declined 2% to $57 million as the benefits of revenue growth and integration of the European businesses were more than offset by a $5 million negative impact from currency translation.
Revenues for the Truck Rental business dipped 2% year over year to $100 million, as volumes declined 6% on account of a 12% shrink in truck rental fleet in 2014. However, the segment posted adjusted EBITDA of $13 million, down 24% compared with the prior-year quarter. The decline in EBITDA was due to lower volume as well as higher per-unit fleet costs related to newly acquired rental fleet.
Other Financials
Avis Budget ended the quarter with cash and cash equivalents of $437 million and total corporate debt of $3,388 million. As of Jun 30, 2014, the company's shareholder equity was $667 million. During the first six months of fiscal 2014, the company generated $1,011 million in operating cash flow.
Moreover, in Jun 2014, the company completed the tuck-in acquisition of eleven airport concession agreements from Advantage for about $6 million.
Share Repurchase
During the second quarter, Avis Budget bought back over 1.3 million shares for $75 million under its $200 million share repurchase authorization approved in Aug 2013. This marks the completion of the program with about 4.6 million shares repurchased since Aug 2013.
Guidance
Following a strong second quarter, the company raised its fiscal 2014 projections for revenue, adjusted EBITDA and earnings per share. The company now projects fiscal 2014 revenues in the range of $8.6–$8.7 billion, marking an increase of 8%–10% from the 2013 level. Earlier, the company projected revenue in the band of $8.4–$8.6 billion, representing a 6%–8% rise.
Further, the company raised the expected rental days forecast for its North America segment to 5%–7% against a 4%–6% increase projected earlier. Moreover, pricing is expected to increase 2% in North America compared with a 1% rise predicted earlier.
Adjusted EBITDA is now expected to be in the range of $860–$910 million, representing a 12%–18% increase year over year. The company had previously provided adjusted EBITDA guidance within $825–$900 million, up 7%–17%. Additionally, the company continues to target $1 billion of adjusted EBITDA in 2015.
Meanwhile, per-unit domestic fleet costs guidance is reiterated with a forecast of nearly to $300–$310 per month in 2014 against $299 per month in 2013. Additionally, per unit fleet costs for the total company are projected to be about $295–$305 per month, representing a 2%–5% rise from 2013.
The company expects interest expense pertaining to corporate debt to be nearly $210 million, down by $18 million compared with the 2013 levels. This compares to $215 million projected in interest expense previously.
The company's non-vehicle depreciation and amortization costs (excluding the amortization of intangibles related to the Avis Europe and Zipcar buyouts) are now expected to be $150 million, skewed toward the lower end of the previously guided range of $150–$155 million. Consequently, the adjusted pre-tax income for 2014 is now anticipated to be in the $500–$550 million range, while the previous guidance stood at $455–$535 million.
The company's effective tax rate in 2014 is expected to be 38% on an adjusted basis, while diluted shares outstanding are projected to be approximately 111 to 112 million.
Based on the above expectations, the company's adjusted earnings guidance is raised to $2.75–$3.05 per share, reflecting a 25%–39% year-over-year increase. Previously, the company had estimated adjusted earnings per share of $2.50–$2.95, with nearly 14%–34% year-over-year growth.
Other Stocks Worth Considering
Stocks which are worth a look in the business services industry include ExamWorks Group Inc. (EXAM), WNS (Holdings) Ltd. (WNS) and InnerWorkings Inc. (INWK). While ExamWorks Group and WNS (Holdings) Ltd. carry a Zacks Rank #1 (Strong Buy), InnerWorkings holds a Zacks Rank #2 (Buy).
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