Main world rental automobile firm Avis Finances Group Inc. ,Nasdaq: CAR) has been tormented by small-sellers by the pandemic, and appropriately so, however fundamentals are altering. CAR is now leaner and higher positioned for leverage A cyclical rebound as economies reopen after COVID and journey restrictions are lifted.
Internet, elevated leisure demand for rental vehicles and a leaner, extra versatile value construction ought to permit CAR to structurally preserve greater margins and regular earnings progress. As well as, the stability sheet is the strongest in years — fleet financing prices are declining, and leverage ranges are very manageable, with no near-term maturities, permitting for extra shareholder-friendly capital allocation choices. sufficient flexibility is created. The newest buyback authorization is a serious catalyst as brief curiosity stays elevated, making a compelling setup for an additional brief squeeze state of affairs to return into play this yr.
Buybacks for CAR have topped in latest months – the corporate repurchased $1.4bn in inventory within the again half of final yr (equal to ~14.2m shares or >20% of excellent pre-authorization shares). A lot of the buybacks have been achieved in 3Q, with CAR gradual repurchases of ~$463m in 4Q. In accordance with firm disclosures, CAR solely repurchased ~$136m by November/December after a low squeeze, reflecting administration’s opportunism.
Since then, nonetheless, the inventory has turn into much less widespread, and though administration has despatched combined alerts on the 4Q name, a leverage stage of 1.5x on the finish of the yr (about two turns under the 3-4x goal) signifies that the corporate has at all times The potential was to opportunistically rethink shopping for again the shares. So, it got here as little shock that Avis introduced one other $1 billion in share buyback authorization this month — clearly, administration nonetheless believes the inventory is undervalued and, for my part, Has turned to extra buybacks as a way of catalyzing the next professional forma. Analysis
Shaping the Potential Buyback Impact
If we account for the extra $1bn licensed by the Board, CAR now has $1.16bn to deploy for the yr. Matching this with the remaining $959m in authorization by 2021 and $160m greater than the newest authorization, means ~$800m buybacks by March 16 (the date of the 1bn buyback announcement). Thus, relying on how a lot of the $800m was deployed after February 11 (the discharge of its 10-Ok submitting), when CAR reported 53.8m shares excellent, the share depend is now ~ 50m mark (assuming $200/one). share common).
So how far more can CAR make the float smaller? Assuming that the ~$250 share worth stays at year-end, CAR could have sufficient to buyback ~4.6m shares based mostly on $1.16bn authorization. It will additionally imply that if Avis workouts its whole buyback authorization (or a ~10% tailwind for EPS), the automobile will doubtless find yourself with 45.4m shares excellent. The extra fascinating angle to this play, for my part, is the implication for shorts – given >20% of the float (>7m shares) is presently bought brief, this is able to imply that Avis would have a big sum of money to spare. Has the flexibility to squeeze. Much less curiosity in the course of the yr.
Sturdy stability sheet creates optionality
Mainly, buybacks are a very good signal – buyback authorizations along with CAR point out administration and the board see worth within the inventory, and thus, buybacks have been a capital deployment technique to this point. Extra importantly, although, CAR has the stability sheet to assist its buyback plans – even with the extra buybacks, Avis is on observe to generate $1-1.5 billion of FCF this yr, leading to There ought to be web company debt of ~$2.5 billion (ie, excluding fleet debt) in 2022.
Assuming that 1Q momentum holds, there may very well be upside to this determine — whereas administration avoided offering additional steering this time, 4Q commentary indicated that value and income optimization efforts are gaining momentum and through the years. Ought to drive CAR’s finest 1Q adj EBITDA outcomes (1Q tends to be a seasonally weak quarter). This outlook can be attributable to seasonal weak point in quantity coming from the Omicron variant impact, so a post-pandemic rebound within the coming quarters ought to assist an outperformance of 2022 for my part.
The corporate already had a snug liquidity place of ~$757m on the finish of 2021, with extra $2.6bn of fleet funding capability and web leverage of ~1.4x – the bottom ever reported by the corporate. Even with the excessive affect of FCF, I see restricted danger to credit score scores from upsized buybacks. Even when administration allocates some funds for the partial redemption of EUR900m of callable EUR bonds, the FCF alone ought to greater than cowl the funding requirement. Given the substantial headroom, I believe extra businesses might convert S&P’s latest improve to BB/secure (from B+), offering one other potential stability sheet catalyst for the yr.
A Cyclic Reflector with Miniature Squeeze Activator
CAR benefited from a big brief squeeze final yr, and administration is reusing the playbook once more with an extra $1 billion of extra buybacks licensed for the yr. Clearly, the board sees worth right here, and with improved stability sheet flexibility, the buyback ought to set a flooring on the inventory’s worth.
To be clear, the CAR story is not in regards to the potential for a low squeeze – basically, the outlook is as sturdy because it has ever been, with post-pandemic margins structurally excessive and disciplined industry-wide provide. / Demand developments are additionally driving pricing stability. Past the present buyback authorization, growing money technology ought to present a stability sheet catalyst not solely from buybacks (except the inventory worth rises) but additionally from additional deleveraging (and potential score upgrades) in addition to progress. From too. -Pushed M&A. At ~6x EV/EBITDA, YTD inventory worth rally nonetheless has legs.