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Tickers in this Article: CAR, R, DTG, HTZ
Battered by sluggish travel demand in Europe, leading global car rental company, Avis Budget Group Inc. (CAR) reported adjusted earnings of $1.46 per share for third-quarter 2012, missing the Zacks Consensus Estimate of $2.51. However, on a year-over-year basis, earnings surged 43% from $1.02 per share. On a reported basis, including one-time items, the company's earnings per share came in at $2.38 in the reported quarter compared with 65 cents in the year-ago quarter. The improvement from the year-ago quarter was primarily driven by strong top-line growth along with improved margins.

As per Avis Budget, overall travel demand remained strong in the quarter under review, while it continued to progress smoothly on the integration of its Avis Europe business acquired in October last year.

Quarter in Detail

Avis Budget's net revenues jumped nearly 34% to $2.170 billion from $1.623 billion in the year-ago quarter, beating the Zacks Consensus Estimate of $2.162 billion. The company's Avis Europe business, which was acquired in October last year, contributed to the year-over-year growth.

Avis Europe contributed $526 million to the total revenue. Excluding the impact of the recent acquisition of Avis Europe, revenue inched up 1% with rental volume exhibiting a 4% rise, while prices went down by 3%.

Driven by solid top-line performance, Avis Budget's adjusted EBITDA for the quarter surged 39% to $377 million, of which $102 million was contributed by Avis Europe. Consequently, Adjusted EBITDA margin for the quarter expanded 29 basis points to 17.05%.

Segment Performance

North American car rental revenue grew 2% to $1.358 billion in the third quarter, primarily attributable to a 4% volume expansion and 7% increase in ancillary revenue, partially offset by a 3% decline in prices. Further, adjusted EBITDA grew 7% year over year to $232 million, primarily benefiting from lower operating and vehicle interest cost, partially offset by an increase of 3% in per-unit fleet costs.

International car rental revenue came in at $703 million, rising over three folds from the year-ago quarter, benefiting mainly from the Avis Europe acquisition. Excluding the effect of the Avis Europe acquisition, the segment's revenue saw just a marginal increase of 1%. A 2% increase in volume along with higher license royalty income drove the year-over-year growth, but was partially offset by a 3% fall in pricing.

Adjusted EBITDA for the segment increased over two folds to $129 million, of which $94 million were contributed by the European operations.

Revenue at Truck Rental declined 3% to $109 million, as benefits from a 2% hike in pricing were more than offset by a dip of 5% in volume. As a result of reduced revenue along with increased vehicle maintenance expenses, the segment's adjusted EBITDA plummeted 36% to $14 million.

Balance Sheet

Avis Budget ended the quarter with cash and cash equivalents of $554 million and total corporate debt of $2.967 billion. At the end of quarter, the company's shareholder's equity stood at $791 million.

Looking Ahead

Avis Budget expects domestic fleet costs to decline in the range of 6%-8% on a per-unit basis in fiscal 2012. The company's non-vehicle depreciation and amortization costs are expected to be about $110 million and net interest expenses are anticipated to be $265 million in 2012.

The company's effective tax rate in 2012 is expected to be in the range of 36%-38% on an adjusted basis, while diluted shares outstanding are projected to be approximately 121 million.

Avis Budget is continuing with its efforts to reduce costs while enhancing productivity through its Performance Excellence initiative as well as five-point cost-reduction and efficiency improvement plan. The company expects its cost-saving initiatives to provide incremental savings of over $50 million in 2012, up from the previous forecast of $45 million.

Moreover, Avis Budget pointed out that it is on track with its integration plans for Avis Europe, acquired on October 3, 2011. In addition to this, the company expects its 2012 results to gain substantially from the integration-related synergies coupled with its strategic initiatives. Annual synergies from the Avis Europe acquisition are expected to touch $0.040 billion compared with its earlier projection of $35 million.

Further, the company now expects full-year total revenue to come at $7.3 billion, which is the lower end of the previously guided range of $7.3-$7.6 billion. Avis Budget lowered its revenue forecast citing weak economic situation in Europe.

Consequently, the company has lowered its upper-end adjusted EBITDA forecast for fiscal 2012. Avis Budget now anticipates adjusted EBITDA to be in between $825 million and $840 million, down from previously projected range of $825-$875 million. Moreover, the adjusted pre-tax income is anticipated to be in the range of $450-$465 million, down from $450-$505 billion estimated earlier.

Based on the above expectations, the company lowered its upper-end adjusted earnings per share guidance for fiscal 2012. The company now expects it in the range of $2.35-$2.45 per share compared with earlier guidance of $2.35-$2.65.

Our Recommendation

Avis follows a core global strategy of partnering with leading travel brands to expand its customer reach while creating additional demand. The company recently made its first appearance in Taiwan, in an effort to expand its Asian operations. Avis Budget's decision to enter Taiwan is backed by growing car rental demand on the island as well as its speeding economic growth.

Moreover, in order to expand its geographical presence, the company is pro-actively looking for strategic acquisitions and alliances to enhance its growth opportunities. The acquisitions of Avis Europe and Apex Car Rentals are the major steps taken by the company to enhance its operational foothold in global markets.

However, we remain slightly cautious about the stock due to the weak European economic conditions and trimmed outlook for fiscal 2012, and therefore maintain a long-term Neutral recommendation on the stock.

Moreover, the risks of operating in a global market and intense competition from other established players, such as Hertz Global Holdings Inc. (HTZ), Enterprise Rent-A-Car, Dollar Thrifty Automotive Group Inc. (DTG) and Ryder System Inc. R) remain the matters of concern.

Avis Budget Group is the leading general-use vehicle rental company in North America, Australia and New Zealand. With a formidable network of more than 10,000 rental locations and 350,000 vehicles, the company boasts a well-established position in the highly-competitive vehicle rental industry.

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