Monday, June 28, 2010

Avis-Budget (NYSE:CAR): Management meeting takeaways – demand trends remain solid

Avis-Budget (NYSE:CAR) is getting positive comments from two tier-1 firms this morning:

- Barclays is reiterating their Overweight rating on CAR and is raising their price target to $16 (prev. $15) along with 2010-2012 estimates.

They believe that earnings for the car rental industry will reflect an increasingly large benefit from the solid improvement witnessed in most business fundamentals and from the deep cost actions taken by the industry. The three main factors which boosted profitability over the past year should indeed continue to provide a tailwind:

- Continued improvement in car resale values and better pricing on purchases of new cars, are reducing fleet costs y-o-y
- Very solid traction in cost savings actions are boosting margins
- Sustained leisure pricing and recent improvements in corporate pricing

In addition to these trends, Barclays believes that the industry is now in the very early stages of a solid expected recovery on the demand side, with rental day comparisons expected to turn positive this quarter, following nearly 2 years of sharp declines. This is material in their view because, having been able to improve profitability in the downturn through large cost and pricing actions, getting help from the demand side will likely create a very large operating leverage and boost earnings growth.

They believe that the recent large uptick in travel trends will translate into a recovery in car rental demand over the rest of 2010 and some more in 2011 and 2012. For CAR, the firm conservatively forecasts domestic days up 2.3% in 2010 and 3.7% in 2011. While this would still leave domestic demand well below the peak levels of 2006-2007, they believe that CAR’s earnings power could recover to above the 2007-08 levels already this year, and get close to the historical peak earnings achieved in 2005 by 2011, benefiting from the major cost improvements realized in the downturn and from the strong operating leverage.

All in all, Barclays' 2010 and 2011 corporate EBITDA estimates are now $426mm and $475mm respectively, up from our previous $380mm and $455mm. They are also initiating a 2012 estimate of $522mm, based on further recovery in car rental demand.

CAR stock price has dropped significantly since the company indicated it wants to top HTZ’s bid for Dollar Thrifty. At current levels, they believe that CAR offers a compelling deep value opportunity regardless of the outcome for DTG, based on the solid earnings trajectory we expect at least through 2012.

Firm's new $16 price target is based on a 7.0x multiple of their new 2011 corporate EBITDA estimate of $475mm, and represents a 15.1x multiple of their 2011 EPS of $1.06, both in line with CAR’s historical average valuation. Firm notes that they arrive at the same price target whether they treat CAR’s $345mm in convertible bond as debt or assume it is converted into common equity.

- Goldman Sachs is out positive on CAR (while Not Rated due to the DTG deal) following meeting with management.

Firm notes CAR management indicated that it “feels good” about 2Q2010, expecting that 2Q will be a bigger quarter than 1Q. While 2Q pricing can be challenging because of seasonality (2Q is the shoulder period between Easter and summer where the industry typically builds its fleet ahead of the summer peak), aggregate volumes are up sequentially as corporate demand continues to be strong. Although investors are concerned about recent trends, management has not seen any changes in the last six weeks. Regarding the upcoming summer months, the company indicated that reservations to date are showing pricing and volume up mid single digits.

Management believes fleets generally remain tight and the industry’s June 1 price increase appears to be sticking. CAR has not seen any material examples of competitor “cheating” (i.e. stealth discounting). The company anticipates it may be able to reach the upper end of its targeted $40 mn to $60 mn in cost saves this year. Management also believes that the used car market should remain healthy for several years, one reason OEM’s are offering more attractive program car deals.

Goldman ntoes they hold an Attractive coverage view on the rental car sector given their belief that corporate travel will recover at a faster rate than expected and that supply remains balanced as car manufacturer restructurings reduce the near term risk that excess cars are pushed down to the rental car

Notablecalls: The comments, especially the ones coming from management (via GSCO) regarding the past 6 weeks being on track should provide at least some temporary relief to the stock.

Short interest stands at a healthy 17% and the stock is down 5pts from its recent $16.50 high.

I'm not expecting a large move but I think we will see some buy interest in CAR today.

Remember that the DTG situation continues to loom..

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