Why This Avis Budget Analyst Remains Bearish Despite Positive Third Quarter Earnings

Due to a surprisingly low $10 a unit per month depreciation figure, Avis Budget Group Inc CAR beat its consenus adjusted EBITDA estimates by 32%.

The Analyst: Morgan Stanley analyst Adam Jonas reported there was a race between falling share count and falling EBITDA, as risks to the downside include used car values falling sharply affecting EBITDA, FCF and the deterioration of pricing and volumes.

Jonas maintained an Underweight rating with a price target of $150 per share.

Key Takeaways: Avis provides automotive vehicle rental and car-sharing services with brands including Avis, Budget and Zipcar.

• The company posted third-quarter adjusted EBITDA of $1.46 billion versus the consensus estimate of $1.108 billion, beating it by roughly 32%.
• Much of the earnings beat can be attributed to approximately 17% related to the nearly $10 a month of America's fleet D&A per unit, versus consensus depreciation figures of $180.
• Avis Budget beating its estimates by a wide margin can also be attributed to its top-line performance in U.S. revenue per transaction day which was at $81.06 compared to the consensus of $78.30.
• International revenue per transaction day came in stronger at $74.45 versus the consensus of $67.36.

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Why It Matters: Jonas said management needs to guide to a more normal level of monthly depreciation in the low to mid $200 range (or more) moving forward since automobile auction company Manheim is posting year-over-year declines from all-time highs.

Although Avis posted strong revenue per transaction day, its low-cost fleet is unsustainable, but regardless of the depreciation surprise, they would still have beat the consensus by over 20%, Jonas said in a Tuesday note. 

The analyst said he was looking for management commentary on the forward volume and pricing environment as well as guidance around fleet normalization from here.

Furthermore, the new price target is based on a normalized earnings analysis with a domestic RPD of $62 and international RPD of $55, assuming 13.0% normalized EBITDA margin, 2X normalized leverage and 8X EV/EBITDA multiples, the analyst noted. 

CAR Price Action: Avis Budget shares were down 6.74% at $220.52 end of market Tuesday. After-hours shares were down 3.55% at $212.69. The 52-week range included a high of $545.11 and a low of $131.83.