Avis Budget Q1 Earnings Beat - Analyst Blog

Leading global car rental company, Avis Budget Group Inc. CAR posted better-than-expected first-quarter 2014 results benefiting from strong volume growth and improved pricing for both leisure and commercial travels in North America. Furthermore, top and bottom lines were aided by strong contributions from recent acquisitions including Zipcar and Payless Car Rental.

Based on the encouraging first quarter results, the shares of this Zacks Rank #2 (Buy) company rose 2.54% during the after-hours trading yesterday. As a strategy, the company remains focused on growing its highly profitable customer segments and channels through acquisitions, which are now yielding results.

First-quarter 2014 adjusted earnings per share of 16 cents doubled from prior-year earnings as well as the Zacks Consensus Estimate of 8 cents. On a reported basis, including certain one-time items, the company reported earnings per share of 3 cents in the first quarter, compared with a loss of 43 cents per share in the year-ago quarter.

Avis Budget's net revenue increased 10.1% year over year to $1,862 million in the quarter and surpassed the Zacks Consensus Estimate of $1,818 million. Revenue growth was primarily driven by the acquisition of Zipcar and Payless and a 6% rise in rental days.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), excluding certain items, for the quarter increased 25.8% to $117 million.

Contributions from Zipcar, which was acquired in Mar 2013, helped Avis Budget's revenue by a contribution of $68 million and adjusted EBITDA by contributing $5 million in the quarter. Meanwhile, Payless, acquired in Jul 2013 aided the company's results with contributions worth $30 million to revenue and $6 million to adjusted EBITDA.

Q4 Segment Performance

North American car rental revenues grew 12.6% year over year to $1,236 million in the quarter, primarily attributable to the acquisition of Zipcar and Payless, a 4% volume expansion and 2% rise in pricing, excluding Payless. Adjusted EBITDA reflected a substantial 22.6% growth to $114 million, on account of higher volume and pricing, partly offset by a 7% rise in per-unit fleet costs.

International car rental revenues came in at $551 million, up 6.6% from the year-ago quarter, benefiting mainly from a 3% rise in rental days and 1% growth in total revenue per rental day. Additionally, the Zipcar acquisition also aided segment revenue growth. Adjusted EBITDA for the segment remained flat at $17 million, primarily driven by revenue growth and benefits realized from the integration of the European businesses that were fully offset by a $9 million negative impact from currency translation.

Revenues for the Truck Rental business dipped 1.3% year over year to $75 million, as volumes declined 3% on account of a 14% drop in truck rental fleet in 2014. However, the segment posted a loss before interest, taxes and depreciation of $2 million, which narrowed by $3 million compared with the prior-year quarter. Results benefited from a 4% rise in pricing.

Balance Sheet

Avis Budget ended the quarter with cash and cash equivalents of $841 million and total corporate debt of $3,696 million. As of Mar 31, 2014, the company's shareholder equity was $703 million. During the quarter, the company generated $390 million in operating cash flow.

Moreover, in Feb 2014, the company completed the tuck-in acquisition of its existing Budget Car & Truck Rental licensee in Edmonton, Alberta, Canada and decided to directly operate Budget Car Rental brand in Portugal with immediate effect. The acquisition for approximately $30 million plus fleet costs will enable the company to gain a larger market share of Canada's domestic, international and truck rental spending.

Share Repurchase

During the first quarter, Avis Budget bought back 1.6 million shares for $75 million under its $200 million authorization approved in Aug 2013. This brings the total share repurchases under the program as of Mar 31, 2014, to 3.2 million for about $125 million. Moreover, the company added another $235 million to its share repurchase authorization in Apr 2014.

Looking Ahead

Following a strong first quarter, the company reiterated its fiscal 2014 adjusted EBITDA forecast while raising its revenue and earnings per share projections for the year. The company now projects fiscal 2014 revenues in the range of $8.4–$8.6 billion, marking an increase of 6%–8% from the 2013 level. Earlier, the company forecasted revenue of $8.3–$8.5 billion, representing growth of 5%–7%.  The company's higher revenue forecast is based on the synergies expected from its recently acquired Budget Edmonton licensee.

Further, the company raised the expected rental days forecast for its North America segment to 4%–6% against a 3%–5% increase projected earlier. However, it reiterated its forecast for a 1% rise in pricing in North America.

Adjusted EBITDA (excluding certain items) is expected to rise about 7%–17% to $825–$900 million.

Per-unit domestic fleet costs are expected to increase 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 $215 million, down by $13 million compared with the 2013 levels.

The company's non-vehicle depreciation and amortization costs (excluding the amortization of intangibles related to the Avis Europe and Zipcar buyouts) are expected to be about $150–$155 million. Consequently, the adjusted pre-tax income for 2014 is anticipated to be in the $455–$535 million range.

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 now projects adjusted earnings (excluding certain items) to be $2.50–$2.95 per share, reflecting a 14%–34% increase year-over-year. This compares with the company's previous forecast of $2.45–$2.85 per share in adjusted earnings with year over year growth of 11%–30%.

Other Stocks Worth Considering

Stocks worth a look in the business services industry include Odyssey Marine Exploration Inc. OMEX, WageWorks Inc. WAGE and Viad Corp. VVI. While Odyssey Marine has a Zacks Rank #1 (Strong Buy), WageWorks and Viad Corp. carry a Zacks Rank #2 (Buy).