May 19, 2014 - Avis Could be Driving Higher as the Economy Improves
InvestorsObserver's analysts are looking at stocks in the automotive industry this week. It seems like no matter where you look, there's a lot going on in the sector. Ford (F) is getting a new CEO, Tesla (TSLA) wants to be the Standard Oil of lithium batteries, Toyota (TM) just set an all-time sales record while General Motors (GM) apparently tried to hide fatal problems with its ignition switches for a decade. And that's just the companies that actually make cars. There are all sorts of interesting things you can find if you look into the companies make auto parts, or sell used cars or any of the many other car-related businesses.
One auto-related business that maybe doesn't get the attention it should is the auto-rental industry. It certainly isn't as exciting as electric cars, and it doesn't carry any of the nostalgia (good or bad) of the big Detroit automakers.
Auto rental, and the related truck rental businesses can provide some interesting information the economy, and hopefully after recovering from the financial crisis, can provide some value to investors as well.
There are two major players in the auto-rental sector in the U.S., Hertz Global (HTZ), and the company I'm focusing on this week, Avis Budget Group (CAR). Avis is the parent company of eponymous Avis Rent a Car and Budget Rent a Car companies as well as Budget Truck rental and Zipcar.
The company's two rental car operations put it in second place behind Hertz, while Budget Truck rental is also in second place in its category.
Zipcar, which Avis acquired in 2013, still rents cars to people, but with a very different model than the traditional model seen at airports and elsewhere. Zipcar is a membership-based car sharing service. Subscribers pay to sign up, then pay an annual membership fee to get access to a network of cars, mostly in urban areas and on college campuses. Members can then use the car for the time they reserved, with gas, parking, insurance and maintenance all included in the price.
This piece of the business seems like it could have a lot of potential as the millennial generation has taken to driving and car ownership less than previous generations. While car ownership may not be appealing to millennials, the ability to access a car on some occasions is practically a necessity in all but a select few cities.
For now, the bulk of the company's business comes from traditional car and truck rentals, and for the first quarter at least, business was good. Avis earned 3 cents per share on a GAAP basis, or 16 cents per share with one-time items excluded. Revenue was $1.86 billion. Analysts had expected the company to earn 8 cents per share on $1.83 billion in revenue, giving the company a win on th4e top and bottom lines.
As Reuters helpfully pointed out in its wrapup of the company's earnings, Americans are traveling more, which has been a boon for both the airlines and the auto-rental industry. The increase in travel could be even better for car renters since they pass the cost of fuel on to consumers directly as opposed to having to adjust prices.
Avis is expecting the good times to continue as it raised its full-year adjusted earnings expectation to $2.50 to $2.95 per share from a prior range of $2.45 to $2.85 per share. The mean estimate for the period is $2.72, which is right about the midpoint of the new range, meaning the company's expectations are pretty much in line with Wall Street's.
Chart courtesy of stockcharts.com
I too expect the company to fare well. Employment seems likely to continue to increase, which should lead to an increase in both business and leisure travel, which help fuel auto rentals. I also believe that while Zipcar is a very small part of the company's business now, it could potentially be much larger as car sharing gains wider acceptance. Avis also has about $235 million in funds authorized to repurchase its own shares, which should help send the stock higher.
Traders who are also optimistic about the company's future could consider an August 43/48 bull-put credit spread. This position yields a credit of $1.05, which is a 26.58% return, or 101.1% on an annualized basis (for comparison purposes only.) This trade will return a full profit so long as the stock closes above $48 at August expiration, giving it more than 7% downside protection.