Avis Funds Group: The Good Instances Are Unlikely to Final and I am Bearish


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funding thesis

I’ve written a number of articles over the previous few months about how international chip shortages are negatively affecting auto manufacturing and demand for platinum group metals (PGMs), for instance right here.

at the moment, i needed to take A have a look at an organization that’s benefiting from a world chip crunch and my decide is Avis Funds Group (NASDAQ:Nasdaq: CAR) It’s a automobile rental firm that posted internet revenue of roughly $400 million in Q2 2021 and the primary drivers for the latter included robust pricing and low depreciation charges.

There’s at present a scarcity of automobiles in america and the costs of used automobiles are at document highs. The scenario is unlikely to return to regular till the worldwide chip scarcity subsides. Some analysts predict that this might occur in a number of months whereas others imagine that the shortfall will proceed for 2 extra years. In any case, the chip scarcity will subside in some unspecified time in the future, and the costs of older automobiles will drop again all the way down to earth. When that occurs, I count on Avis’ earnings to drop considerably and its share worth to drop to its 2019 stage of about $30 per share. let’s overview.

Overview of Enterprise and Financials

Avis describes itself as a world supplier of mobility options with a portfolio of premium and leisure automobile rental and sharing manufacturers (Slide 4 right here). Its community consists of greater than 10,000 places in roughly 180 nations.

(Supply: Avis Funds Group)

Seems like a diversified enterprise, however trying on the distribution of income, the image is completely different. Solely two manufacturers contribute 90% of the income and the corporate’s enterprise is concentrated within the US.

(Supply: Avis Funds Group)

The group’s Q2 2021 revenues have returned to pre-Covid 19 ranges and EBITDA has surpassed them as effectively. Nonetheless, worldwide operations nonetheless have horrible margins.

(Supply: Avis Funds Group)

My view is that the corporate is unlikely to ever make a great revenue outdoors that sector. For instance, I offer you my nation, as a result of I’ve direct expertise. I’m in Bulgaria and the automobile rental market right here is very fragmented and commoditized. Right here many of the firms provide comparable charges and the model does not matter in any respect. Once I need to hire a automobile, all I can do is test which of the handfuls of firms in the marketplace provide the bottom charge for that particular mannequin. Margins are low and the market is going through additional stress from the speedy progress of Sofia-focused electrical car-sharing firm Spark. Some individuals do not like to make use of Spark, the reason is vary issues, however that’s prone to change sooner or later. Automobiles aren’t totally charged, which suggests you will must waste time charging them until you need to danger getting caught within the center. I had a good friend whose battery died about 100 km from Sofia and needed to name a toll truck.

General, my level is that because the market is commoditized, margins will all the time be low and Avis might be higher off focusing its sources on its extremely worthwhile US operations.

Now, let’s examine the corporate’s Q2 2021 financials with the identical interval in 2019 to see the place the enhancements are coming from. The corporate booked its highest ever adjusted EBITDA and margin in its 75-year historical past, and was boosted by robust pricing and a good fleet. As you possibly can see from the tables under, quarterly income returned to 2019 ranges and pre-tax revenue improved primarily on account of decrease working bills and automobile depreciation and lease expenses.

(Supply: Avis Q2 2021 Fin Report, and Q2 2019 Fin Report)

Automotive demand in america is quickly bettering and the market is missing which will be clearly seen within the used automobile knowledge. In keeping with knowledge from Mannheim Consulting, wholesale used automobile costs have been growing quickly since Might 2020. The Mannheim Used Automobile Worth Index peaked at 201.4 for the primary 15 days in September, a rise of almost 25% in comparison with the identical interval. 2020.

(supply: Mannheim)

Nonetheless, cracks are beginning to present. In keeping with Mannheim, used retail provide elevated to 42 days whereas wholesale provide elevated to 19 days. Whereas the wholesale provide continues to be low, the retail provide is now at regular ranges.

As the worldwide chip scarcity begins to dwindle, the market ought to return to full normalcy. Some individuals assume it might probably occur in a number of months, whereas some assume it might probably take a 12 months or two. In keeping with Japan’s RoHM Firm (OTCPK:ROHCF), which is a provider of Ford (F), Toyota (TM), and Honda (HMC), the provision shortfall is prone to final at the very least till 2022. BMW (OTCPK:BMWYY) chairman Oliver Gipsey lately warned that chip shortages may final six to 12 months.

On condition that used retail provides are returning to regular and chip shortages could ease comparatively quickly, I feel it is likely to be a good suggestion to start out promoting Avis. As soon as automakers are capable of meet the suppressed demand, the costs of used automobiles will come down. The impact on Avis is that pricing ought to weaken and automobile depreciation ought to enhance. With that, internet revenue ought to come as much as 2019 ranges and comply with the share worth.

For my part, Avis’ stability sheet is weak, however it’s not vulnerable to chapter as soon as the markets return to regular. Shareholders’ fairness stood at simply $92 million in June and the corporate had $10.4 billion in debt. Nonetheless, there aren’t any vital debt maturities till 2024.

(Supply: Avis Funds Group)

Investor Takeaway

The worldwide chip scarcity has pushed document used automobile costs in america and is enabling automobile rental firms like Avis to guide the perfect monetary ends in their historical past. Nonetheless, chip shortages will begin to dwindle in some unspecified time in the future and the used retail provide has lately exceeded 40 days.

In mild of the newest developments, this might be simply nearly as good for Avis and I count on the corporate’s income and share worth to start out falling to 2019 ranges within the close to future. I’m bearish and traders can reap the benefits of this by quick promoting the shares. In keeping with knowledge from Fintel, the small lending payment charge is simply 0.47% on the time of writing. I feel the LEAP choice additionally seems like a viable concept.

The most important danger for short-sellers proper now could be the China power disaster, which is wreaking havoc on international provide chains. If we do get a chilly, the chip scarcity may get even worse over the subsequent few months.

The issue with Avis’s LEAP choices is that they are costly and it is unattainable to foretell whether or not we’ll run wanting one other chip in a 12 months or two.



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