Should You Take a Ride with This Car Rental Company?
You wouldn't think a simple business such as a car rental company would be anything to get excited about, but Avis Budget Group is proving that theory wrong. With a share price that has more than doubled this year along with the fundamentals to back it up, the company's ride may be far from over. Foolish investors may want to take a closer look at the results and developments.
Avis Budget Group reported its third-quarter results on Oct. 30. Revenue popped 10% to $2.4 billion. Earnings before interest, taxes, depreciation, and amortization, or EBITDA, touched a new record and rose 2% to $383 million. Adjusted net income was flat at $171 million or $1.48 per share.
CEO Ronald L. Nelson credited the record quarter with "a combination of volume growth and solid pricing in North America, along with the strongest results in recent history in EMEA." He also stated that the stabilization of residual values of cars in North America helped along with synergies from its Zipcar acquisition. Avis Budget Group saw growth across all of its brands.
The company guided for full year 2013 revenue of $7.90 billion-$7.95 billion with adjusted earnings per share of $2.10-$2.55. This implies fourth-quarter revenue of $1.81 billion-$1.85 billion and adjusted earnings per share of $0.05-$0.50. That's quite a range.
One thing that should help Avis Budget Group in the quarters and years ahead is a deal it announced on Nov. 25 that consisted of an exclusive marketing agreement with Norwegian Cruise Line Holdings . Under the agreement, Norwegian Cruise Line will promote "pre-cruise tours packages" using Avis Budget Group's cars. Likewise, Avis Budget Group will promote Norwegian Cruise Line to its customers.
Given Norwegian Cruise Line's sales volume, the deal could make a material difference to Avis Budget Group's bottom line. Last quarter, Norwegian Cruise Line reported that revenue climbed 18.4% to $798 million. Adjusted EBITDA popped 21.2% to $271 million and adjusted net income rocketed 42.1% to $182.2 million.
In the conference call, Nelson spoke a bit about the company's acquisition of Payless in July. What's neat about the Payless brand is that it's considered somewhat "deep value" because of its older cars. This means that the company can sort of do a "hand me down" from its Avis line to its Payless brand. Previously, Avis had to sell the old cars and it lost some value along the way. Now the company anticipates that it will buy very few, if any, new cars for the Payless brand. This should greatly reduce future costs and cash needs which will allow greater profitability and potentially more cash returned to shareholders.
Avis Budget Group is not shy about returning cash to shareholders. In the third quarter, the company bought back $25 million in stock in the open market. The company is targeting at least $500 million in free cash flow by 2015.
Foolish final thoughts
If Avis Budget Group's results work out as planned, expect to see greater profit margins in 2014 and beyond. This means more of every dollar in revenue will reach the bottom line in income and free cash flow. Look for the top line to grow as well as the company believes the economy is turning around in North America and has bottomed in Europe. Both of these, if true, could make Avis Budget Group remain a big winner.
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The article Should You Take a Ride with This Car Rental Company? originally appeared on Fool.com.Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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