Iridian decreases position in Avis Budget Group
Iridian Asset Management traded notable positions in the third quarter. It initiated new stakes in Graphic Packaging Holding Company (GPK), Altera Corporation (ALTR), and Timken Company (TKR). The fund also sold its shares in Health Net, Inc. (HNT), Tyco International Ltd. (TYC), and SeaWorld Entertainment (SEAS). During 3Q14, the fund increased its position in Phillips 66 (PSX) and NCR Corporation (NCR) and decreased its position in Dresser-Rand Group Inc. (DRC) and Avis Budget Group, Inc. (CAR).
Iridian lowered its position in Avis Budget Group, Inc. (CAR), which now accounts for 2.46% of the fund’s third-quarter portfolio.
Avis Budget Group, a leading vehicle rental service provider
Avis Budget Group, Inc. (CAR) is a leading global provider of vehicle rental services through its Avis and Budget brands. Avis Budget Group has more than 10,000 rental locations in approximately 175 countries around the world. The company also has more than 900,000 members in its Zipcar brand, the world’s leading car-sharing network. Avis Budget Group operates most of its car rental offices directly in North America, Europe, and Australia, and through licensees in other parts of the world. Avis Budget Group, headquartered in Parsippany, New Jersey, has approximately 29,000 employees.
Rise in revenue driven by higher pricing and high volumes
Avis Budget Group’s revenue increased 6% in 3Q14, compared to the same quarter a year ago, primarily due to a 6% increase in rental days and increased pricing in North America. Third-quarter adjusted earnings before interest, tax, depreciation, and amortization (or EBITDA) increased 9%, to $417 million, primarily due to higher rental volumes and increased year-over-year pricing in North America, partially offset by higher fleet costs.
On the earning call, the company’s chairman said, “Our record third quarter results were driven by a continuation of the strong volume and pricing trends we experienced in North America in the first half of the year. We delivered record results in Europe this summer, and volume and pricing in North America continue to be robust, giving us confidence that 2014 will be the most profitable year in our Company’s history.”
Performance of Avis Budget’s business segments
Avis Budget Group’s North America revenue increased 8%, primarily due to an increase in volume, higher pricing, and an increase in ancillary revenue per rental day. Internationally, revenue increased 4%, primarily due to a 4% increase in total revenue per rental day. The company’s truck rental fleet was 8% smaller in 2014, which resulted in a revenue decline of 5% due to a 5% decrease in volume.
Avis Budget to acquire rental locations from ACE
In August, Avis Budget Group (CAR) acquired 11 car rental locations from ACE Rent a Car for approximately $10 million plus the cost of the acquired fleet. Locations included operations at Chicago O’Hare, Dallas Love Field, and three other airports.
In October, the company announced it has entered into a definitive agreement to acquire its Budget licensee for Southern California, which operates directly at Los Angeles International Airport and through sublicensees throughout Southern California and parts of Nevada. The acquisition is scheduled to close in the fourth quarter of 2014. The purchase price will be approximately $210 million plus the cost of the acquired fleet.
Avis Budget Group repurchases shares
In 3Q14, Avis Budget Group repurchased approximately 980,000 shares of its common stock at a cost of $60 million. As of September 30, 2014, the company repurchased a total of 5.5 million shares at a cost of approximately $260 million since August 2013. In October, the company announced it has authorized a $200 million expansion of its share repurchase program.
Outlook for 2014 positive
Avis Budget Group (CAR) narrowed its full-year 2014 projections of adjusted EBITDA and earnings per share. The company now expects full-year 2014 revenue to be approximately $8.5 billion, roughly a 7% increase compared to 2013. In the company’s North America segment, rental days are expected to increase 6% to 7%, and pricing is expected to increase 2% to 3% in constant currency in 2014.
The company’s effective tax rate in 2014 will be approximately 37%, excluding certain items, and its diluted share count will be 110 to 111 million, including the effect of repurchasing $300 million to $330 million of outstanding shares in 2014.
Based on these expectations, Avis Budget Group, Inc. (CAR) estimates that its 2014 diluted earnings per share, excluding certain items, will increase 28% to 36%, compared to $2.82 to $3.00 in 2013. The company also continues to target $1 billion or more of adjusted EBITDA in 2015.