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 (
) is getting a new CEO, Tesla (
) wants to be the Standard Oil of lithium batteries, Toyota (
) just set an all-time sales record while General Motors (
) 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 (
), 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
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
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
, 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
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.
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