On Aug 30, we downgraded our recommendation on
Avis Budget Group, Inc.
), to Underperform based on the company's dismal second-quarter
2013 results and the rising fleet costs.
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Why the Downgrade?
Estimates for Avis Budget, which provides vehicle rental
services, have been declining ever since the company reported
second-quarter results on Aug 6. Avis Budget's second-quarter
revenues of $2002.0 million missed the Zacks Consensus Estimates
of $2,027.0 million. Moreover, quarterly earnings fell 47% year
over year to 50 cents a share; however, it came a penny ahead of
the Zacks Consensus Estimate.
Following the results, Avis Budget reaffirmed fiscal 2013
revenues in the range of $7.8-$8.0 billion. However, the company
narrowed its adjusted earnings before interest, taxes,
depreciation and amortization (EBITDA) guidance range to
$750-$800 million from $750-$855 million forecasted earlier.
Moreover, Avis Budget reduced its median earnings forecast for
fiscal 2013 to $2.20 from $2.30 projected previously.
Consequently, we observed that the Zacks Consensus Estimates for
2013 and 2014 fell 6.8% and 7.1% to $2.20 and $2.73, respectively
over the last 30 days. With the Zacks Consensus Estimates for
both 2013 and 2014 going down, the company now has a Zacks Rank
#5 (Strong Sell).
Causes of Concern
The prevalent sluggish economic scenario in both Europe and
Australia, along with rising fleet costs continue to weigh upon
the company's performance. However, Avis Budget is optimistic
about its disciplined pricing initiatives and expects them to
offset a possible rise in its North American business fleet
Nevertheless, we consider this to be difficult, owing to the
company's long-term agreements with corporate bigwigs and the
aggressive pricing strategy adopted by competitors. Moreover, the
company upped its forecasts for per-unit domestic fleet costs,
which are expected to increase nearly 25% to $300 per month in
2013. Hence, Avis Budget's margins may be under pressure in 2013.
Moreover, Avis Budget is highly dependent on third-party
distribution channels. In the reported quarter, nearly 47% of
Avis Budget's domestic car rental reservations came through
third-party distribution channels. Consequently, any disruption
and termination of relationships with third parties or reduction
in transaction volume may have an adverse impact on the financial
condition and results of the company.
Given the second-quarter performance and Avis Budget's tepid
outlook, we do not see any significant catalyst that could drive
the shares in the near term.
Stocks That Warrant a Look
While we prefer to avoid Avis Budget till there are signs of
improvement in the company's performance, other retail stocks
worth a look include
Interval Leisure Group, Inc.
). All these carry a Zacks Rank #1 (Strong Buy).