Avis Budget Group (NYSE:CAR) — Room For Downgrades
Avis Budget Group (NYSE:CAR) is a New Jersey-based international company that provides car and truck rentals as well as related services. Given the latest Manheim Used Vehicle Value Index value of 121, a new record, there’s plenty of reason to take a second look at this name.
Here to provide additional insight on what the value means for Avis Budget is Agora Financial editor Dan Amoss. From his latest report:
“We last updated Avis Budget (NYSE:CAR) when the stock was trading above $13. Amazingly, despite the rapid decline in U.S. leading economic indicators, and the return of sobriety in the corporate bond market, the sell side still focuses on scarcely relevant data like the monthly fluctuations in the Manheim Used Vehicle Value Index. On Monday, Manheim published the latest index value of 121, a new record:
“We can trace the strength in the Manheim Index back to the “cash for clunkers” giveaway to the auto companies, which needlessly destroyed hundreds of thousands of perfectly good cars — the type of cheap cars that many unemployed people rely on in their job searches. The government’s destruction of the used car supply has boosted prices temporarily. But the other factor in used car pricing — demand — will remain weak as the U.S. population of registered autos stagnates or shrinks.
“CAR bulls focus on the fact that strength in used vehicle prices will boost one-time gains from selling depreciated cars out of the fleet. This happens because Avis buys a new car, books depreciation charges against it as it is rented out, and then sells it (hopefully) above its book value a few years later.
“Upticks in the Manheim Index can boost CAR’s reported earnings. But this effect is only temporary; it will reverse once the index turns back down. Its effect on earnings should be viewed as a ‘one-time’ item.
“Here’s the main problem with the sell-side’s obsession with depreciation accounting: if it wants to maintain its earnings power, Avis must reinvest the sale proceeds from old cars into a new car. This negates the fantasy that car rental companies ever generate consistent free cash flow.”
According to Amoss, Avis Budget can generate free cash flow when it’s aggressively shrinking its fleets, but that would also be reflected in much lower earnings multiples. In light of that fact, the company is still looking at potential analyst downgrades.
That’s just the overview. The only way to get Amoss’ actionable recommendations for CAR, and all the companies he researches, is to sign up for his newsletter, the Strategic Short Report.
It’s available through the Agora Financial reports page, which can be found here.
[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]