It's a scary yet exciting time for car rental companies like Avis Budget Group (NASDAQ: CAR). Scary because major automakers are expanding smart-mobility projects that range from car-sharing to ride-hailing services, and upstart transport companies such as Uber and Lyft are infringing on rental companies' traditional turf. Yet exciting for Avis because it recently sealed a partnership with Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) to provide fleet support and maintenance services to Waymo's self-driving program. Scary again because its chief rival, Hertz Global Holdings, recently hooked up with Apple to try to adapt to the rapidly evolving automotive industry, so the two are bound to be in even closer competition.
However, as uncertainty looms and potential catalysts ramp up, investors are for now stuck with the status quo.
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By the numbers
Avis' Q2 revenue checked in at $2.24 billion, which was flat year over year, but slightly below Wall Street analysts' consensus estimate for $2.27 billion. The bottom line was a little bit murkier, with net income of $3 million, or earnings per share of $0.04, but adjusted earnings per share of $0.30 per share. Unfortunately for investors and Avis, that adjusted EPS was well below analysts' consensus forecast of $0.51 per share.
The underlying issues that led to that bottom-line miss were a 4% reduction in pricing in the Americas due to industrywide oversupply of fleet vehicles and higher per-unit fleet costs. On the bright side, CEO Larry De Shon asserted that the industry was improving. "Industry fleet levels in the Americas normalized to demand toward the end of the second quarter. This enabled us to transition to improved pricing, with revenue per day up more than 1% in July. Looking forward, I am now more optimistic that the industry issues we've been contending with should be behind us," he said in the earnings press release.
Not all of Avis' Q2 was doom and gloom, though. The company noted that there was an increase in overall rental days, though it was offset by weaker pricing -- thus setting the stage for solid results if rental days remain up and pricing rebounds. Another way management plans to tackle a sinking bottom line is through cost-cutting. Avis believes it can generate $25 million in additional savings globally, bringing its total expected savings during 2017 to a healthy $75 million.
But incremental savings wasn't enough for management to maintain its full-year guidance. The company now expects adjusted annual EPS of between $2.40 and $2.85, far below prior guidance for $2.85 to $3.50. To meet analysts' previous estimates, it will have to land near the top of that new range.
Further reflecting management's pessimism was the fact that it toned down its share repurchase expectations: Avis now forecasts buying back only between $200 million and $250 million worth of stock this year, compared to prior guidance of $300 million.
All is not lost
Sure, Q2 was a disappointment, and analysts and investors are concerned that up-and-coming businesses such as Uber and Lyft have some overlap with the car-rental business. Furthermore, automakers are also exploring ride-sharing and short-term rental programs and services. These uncertainties will continue to weigh on Avis' stock price.
On the flip side, this could also be an exciting time for investors if management can think outside the box and generate new revenue streams. Avis' new partnership with Waymo was a huge surprise, and could be a sign of developments to come.
"Our recently announced partnerships with both Waymo and RocketSpace [a "technology campus for startups"] are providing opportunities to pilot scalable new business models as we start to execute on our strategy to leverage our fleet management and logistics capabilities in the rapidly developing mobility space," said De Shon in the press release. "I'm also excited about all of the innovative growth initiatives we've announced this year, including enabling Avis customers to transact with us through Amazon Alexa and Google Home."
If nothing else, Avis' most recent quarter emphasizes how risky an investment this company is. If management can develop partnerships and find ways to generate new revenue streams, this could be a rebound story. If it can't, and automakers and ride-hailing companies continue to eat away at its legacy business, there will be many more weak quarters to come.
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