What's Driving This Car Rental Company's Growth?
Avis Budget Group (NAS: CAR) recently posted disappointing fourth-quarter numbers, despite a general uplift in the country's economy. Although there was a spike in its top line, profits were in the red because of pricing pressures that narrowed the company's margins.
But it's the company's exposure to new markets along with its strategic tie-ins that make me feel good about Avis.
During the fourth quarter, Avis saw a 33% year-over-year revenue surge. After accounting for one-time acquisition costs, though, the company posted a loss of $0.14 per share, as opposed to a $0.06 profit the Street expected.
Increased rental day volume was somewhat pulled down by a 2% slide in Avis' rental rate per transaction. In January, the company faced the same challenge. But Avis isn't alone in its inability to raise rental rates. For instance, in its latest quarter, industry peer Hertz (NYS: HTZ) complained that its rates fell by 4.2%.
In a bid to improve margins, Avis plans to increase rates on its leisure business beginning in March. I think that with the economy in a slow recovery mode, higher rates could be comfortably absorbed. This remains an industrywide issue, and it should sort itself out.
Let's look at two recent moves that could work out well for Avis in the future.
Move 1: International expansion
International revenue more than tripled thanks to the Avis Europe acquisition, which accounted for 25% of the company's sales this quarter. The less than 2% decline in European revenues was completely offset by an 11% year-over-year increase from other regions. While Europe faces economic headwinds, the company managed to increase prices by 1% in the quarter. At the same time, the European region's contribution to Avis Europe's volume licensee profit is just 50%. The other 50% comes from rapidly growing markets such as India, China, Saudi Arabia, South Africa, Israel, and Turkey.
Keeping this in mind, the Avis Europe buyout has enabled the company to gain more exposure to new high-growth economies, along with ensuring brand consistency for its Avis and Budget brands around the globe. So if you thought that Avis Europe was a bad investment, you must consider this growth potential.
Move 2: Strategic tie-ins
The company expanded its tie-in with United Continental Holdings (NYS: UAL) , which now makes Avis the official "preferred car rental partner" of the airline company. Avis will feature on the airline's website and get more direct exposure to travelers, in a marketing opportunity that's sure to improve the company's visibility and benefit its bookings. Avis also signed a multiyear agreement with the PGA Tour, which will make Avis its official car-rental company. Given the popularity of the tournament, this looks like a perfect opportunity for Avis to engage its target market.
The Foolish takeaway
And that's not all, as Avis has undertaken a host of cost-cutting initiatives that should help margins in the medium term. Although pricing pressures may have affected the company's numbers for now, this trend is unlikely to continue for long. Sales are set to get a major boost with the acquisition of Avis Europe and the tie-in with United Continental Holdings. Time to keep an eye on this stock.
At the time this article was published Fool contributor Navjot Kaur owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.