Avis Budget Group, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Avis Budget Group is a global car rental and mobility solutions provider, operating under brands like Avis, Budget, and Zipcar. They serve both business and leisure customers through a network of company-operated and franchised locations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Avis Budget Group (CAR) operates primarily in the vehicle rental and mobility solutions sector with three major business areas: Americas (which includes North America, South America, Central America, and the Caribbean), International (primarily Europe, the Middle East, Africa, and Asia), and a car sharing operation called Zipcar. They offer rentals of cars, trucks, and vans for varying periods for diverse customers ranging from individuals to large corporations.

Revenue Distribution:

  • Americas: Predominantly car rental services in North America.
  • International: Operations mainly span across Europe, the Middle East, Africa, and Asia, with operations in a range of countries with various local market characteristics.
  • Zipcar: Offers car-sharing memberships, primarily in urban areas.

Industry Trends & Competitive Landscape

The vehicle rental and mobility sector is highly competitive with a few main players dominating the global market, including Enterprise Holdings, Hertz, and Avis Budget Group. Competition is intense, driven by brand recognition, pricing, location density, and customer service.

  • Market Consolidation: The car rental industry is consolidating, with acquisitions and mergers becoming increasingly common.
  • Technological Advancements: Fleet management software, online booking platforms, and mobile apps have become essential for customer acquisition, operational efficiency, and personalized services.
  • Shifting Customer Preferences: An increasing number of consumers are looking for alternative mobility solutions, such as car sharing and ride-hailing services, creating new competition and opportunities.
  • Environmental and Social Considerations: Growing customer awareness and preference for sustainable options is putting pressure on rental companies to offer electric vehicles and incorporate environmental best practices.
  • Travel patterns: More leisure and less business travel has shifted business towards more volatile consumer markets

What Makes CAR Different?

  • Multi-Brand Strategy: Avis Budget Group has a portfolio of brands (Avis, Budget, Zipcar) that each cater to different market segments, which allows them to capture a wider range of customers with differentiated price points, offerings, and experience.
  • Zipcar’s Unique Business Model: Zipcar operates primarily in urban areas, often in high demand locations, and is a car-sharing business model that requires fewer physical locations than traditional car rental. This is a significant differentiator, although it exposes the company to high growth/ low scalability trade offs.
  • Global Presence: While not uniquely so, the company has operations across various geographies and has many different ways to capitalize on international markets and cater to specific demands.

Financials

I will focus on the most recent reports, which is 10-Q for the quarter ended September 30, 2024, and also the annual report for 2022.

Income Statement Analysis

  • Revenues:
    • In Q3 2024, Avis generated $3.1 billion in revenues, a slight increase from Q3 2023’s $3.09 billion due to increased pricing but volume remained similar. This is also caused by a stronger currency exchange impact.
    • For the 9 months ended September 2024, revenue was $9.46 billion compared to $9.47 billion for the similar period in 2023. The revenues in 2023 benefited from strong pricing gains which did not repeat in 2024, also offset by a decline in international revenues, which have suffered from volatile economic and political situations.
  • Year ended 2023 revenue was $12,008 million a decrease from $11,004 million in 2022 due to a decreased rental volume.
  • Operating Expenses:
    • In Q3 2024, expenses reached $2.98 billion, a 7% increase compared to Q3 2023 caused by increase in fleet depreciation, vehicle interest, and other costs.
    • For the nine months ended September 2024, expenses were $8.75 billion vs $8.03 billion in the similar prior year period, primarily driven by increased vehicle depreciation, vehicle interest, and other operating expenses. This resulted in operating income decreasing by around 74%.
    • In year ended 2022, Expenses were 7.9 billion and 8.3 billion in 2021, showing a higher cost base in the latest reports.
  • Net Income:
    • In Q3 2024, net income came in at $14 million, whereas in Q3 2023 it was $286 million. A huge decrease, due to increased borrowing costs, higher depreciation and fleet expenses.
    • Net income for the nine months ended September 2024 was $140 million compared to $1.38 billion for the similar prior year period mainly due to increased interest expense.
    • Net income in 2023 was $1.68 billion a decrease from $2.49 billion in 2022 due to higher borrowing and operating costs.
  • Earnings per share (EPS): EPS for Q3 2024 was at $0.41 (diluted) whereas diluted EPS in Q3 2023 was $11.13 per share. There was also a decrease in EPS for the 9 months ending Sept 30 2024. Diluted EPS in 2023 was $42.08.
  • Key Takeaways
    • Despite revenue consistency, profits have decreased due to increasing interest costs, depreciation, and fleet related costs.
    • Recent performance is underwhelming, and the company is not able to maintain profitability at the same level.

Balance Sheet Analysis

  • Assets:
    • Total assets at $32.8 billion in 2023, and 31.8 billion in 2022.
      • The largest asset is the fleet vehicles.
    • Cash has slightly increased.
  • Liabilities:
    • Total liabilities have reduced to $27.6 billion. This is a good sign of deleveraging.
    • Most liabilities are derived from debt and short-term debt.
    • Shareholder’s equity shows a slight increase to $4.3 billion
  • Key Takeaways
    • The company remains highly leveraged.
      • The most recent reports show more liabilities than assets in terms of book value. However, we need to account for asset and liability revaluations, including intangible assets.

Cash Flow Analysis

  • Cash flow from operating activities saw a decrease in Q3 2024.
  • Net cash from operating activities in 2023 was $3.5 billion, a decrease from $4.6 billion in 2022.
  • Cash flow used in investing increased in 2023 to -2.5 billion. This shows a higher capital expenditure.
    • These cash flow statements need to be viewed through the context of the vehicle programs, that provide credit to manufacturers with the aim of guaranteeing future purchases, thus may lead to higher cash balances in certain time periods, while appearing as liabilities on the balance sheet.
  • Net cash from financing activities is very volatile.
  • Key Takeaways: Company is generating cash, but is also having higher capital expenditures and financing costs, leading to less cash available for operations.

Moat Rating: 2 / 5

I am giving Avis Budget Group (CAR) a moat rating of 2/5 with the following justifications:

  • Brand Recognition (Narrow): Avis and Budget are recognizable brands in the car rental market. However, brand alone isn’t enough to create a wide moat. Many other players in the car-rental and mobility industry have similar brand recognition. Although the company owns a significant portfolio of brands and locations, they are easy to replicate and do not provide a strong competitive advantage in itself. However, some degree of recognition is important to maintain, as well as the fact they have been in business for many decades.
  • Switching Costs (Low): Switching costs for car rental are relatively low. Consumers can easily switch between brands based on price, availability, and convenience. If another car rental location is better or cheaper, it would take minimal effort for customers to chose another option.
  • Economies of Scale (Partial): Avis Budget has a large fleet and network of locations, which gives them some economies of scale. However, there are competing companies of equal, if not greater size, which erodes its advantages on scale alone. It doesn’t appear that any one car rental company has significantly greater scale than all the others.
  • Network Effect (Zipcar-Small): Zipcar has a regional-scale network effect, but it isn’t very strong due to competition in the mobility solutions space. While it is difficult for new entrants to compete on an established network, it is not impossible as companies like Uber and Lyft have shown.
  • Intangible Assets (Moderate): The company has some intangible assets such as brand names, but these are not of strong enough to deter new players from the market.

Overall: Avis has certain competitive advantages in terms of its multiple brands and scale, however its limited pricing power and ease of customer switching make it difficult to form a wide moat.

Risks to the Moat and Business Resilience

  • Disruption: The emergence of new mobility solutions like ride-hailing services, electric vehicle rentals, or subscription-based ownership models poses a risk to Avis’s traditional business model.
  • Economic Downturn: The car rental industry is cyclical and sensitive to economic conditions, which may lead to decreased rental demand and lower prices in case of a recession or economic downturn.
  • Fuel Prices and Fleet Costs: Increasing fuel costs can negatively impact operating margins. The company relies heavily on its car manufacturers and they have faced issues in terms of their performance in recent quarters.
  • Increased Competition: More new players in the space that are focusing on better and more streamlined operations can negatively affect Avis’s overall market share and long term profitability
  • High Leverage: A large debt burden increases financial risks, particularly as interest rates rise.
  • Technological Shifts: The industry can be rapidly changed by new technologies such as self-driving cars or new booking methods.

Business Resilience: Avis has shown some ability to endure adverse times, owing to its established brand and strong presence in the industry. However, it is heavily leveraged, and not as easily diversified and resilient as other companies. With significant fluctuations in the economy and in its industry, the company’s reliance on a mature and somewhat commoditized business model makes it less prepared for the future.

  • Ability to pass on costs: As a rental company, a business that operates through leases can’t easily pass on increased operating costs such as fuel to its customers. That means profitability is tied to good price management, as well as operational efficiency.
  • Brand equity as buffer: In times of difficulty, some customers might be more likely to favor established car rental providers, which could provide a small cushion against poor financial results
  • Fleet diversification: A more diverse fleet, including more efficient cars and electric options, gives the ability to increase profit or minimize downside.

Understandability: 3 / 5

Avis’s business model is easy to grasp in its core car-rental offering. However the business model becomes quite complicated with its different brands, complex financial structures, as well as its geographic reach and the economic effects it brings.

  • Core Business: Car rentals are relatively straightforward to understand and the core business is fairly simple.
  • Operations : Operations across various geographies and across varying customer segments add a layer of complexity.
  • Financial Complexity: The use of off-balance sheet debt and other complex financial instruments increase complexity and it is difficult to accurately analyze the company’s financial performance without a large effort.
  • Industry Dynamics: Understanding industry consolidation, competition, and the influence of technology and pricing can be difficult without extensive knowledge and research in the industry.

Balance Sheet Health: 3 / 5

Avis has a somewhat levered balance sheet, with a substantial amount of debt relative to its equity and operations, resulting in a moderate balance sheet health score.

  • Leverage: While the company is highly levered, the recent reports show that it is deleveraging, which can improve this rating in the near term.
  • Assets and Liquidity: It has a large amount of assets, however, much of the value is tied into its fleet of vehicles.
  • Cash Balance: Cash balance is positive and has been relatively stable. However, it is not very high compared to total assets.

Summary Avis Budget Group operates in a highly competitive market, where its moat and financial performance are average. It’s strategy of operating under a number of brands and serving multiple geographies, seems like a sensible strategy, however, it may not be enough to provide a wider moat. While its financial performance seems underwhelming, management are making strides to improve profitability and improve its financial position, so it’s important to keep an eye on for any positive changes.