Avis Budget Cut Costs but Still Losing Money

Avis Budget Group (CAR) reported their fiscal fourth quarter loss narrowed, but weak guidance has the stock trading down more than 15% in Thursday afternoon trading. Overall, the company reported a loss of $49 million or 47 cents per share, which is far better than the $121 million they lost a year ago. When excluding one-time items the loss was only 25 cents, and consensus analysts’ estimates had called for a loss of 28 cents per share. The earnings beat was enabled by cost cutting as expenses fell by 12% from a year ago thanks to a smaller fleet among other efforts.

Revenue declined by 8% to $1.16 billion amid soft demand for rental cars. Unfortunately, management does not see demand improving in the first half of 2010, and expects volume to decline in the first half of the year. They are “cautiously optimistic” towards the full year 2010, as they hope to see a modest recovery in the second half. Wall Street research coverage is pretty light on Avis Budget with only three active firms, but the consensus for this year is EPS of $0.73 on revenue of $5.3 billion. Those estimates forecast better than 3% revenue growth, which judging by management’s cautious outlook may be too aggressive.

At Ockham, we have Avis rated as Overvalued as the stock is not attractively priced given the weak fundamentals. For example, the price-to-cash earnings multiple is currently 3.5x which is well above this stock’s historically normal range of .62x to 2.97x. Clearly, there is a fair amount of improvement already priced in to CAR at this time, and we are concerned that the improvement may be slow in coming. Given slumping sales, still unprofitable operations, and a very weak outlook for the first half of the year, we think the stock would be much more appropriately priced around $8 per share.

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