Avis Budget Group Inc. (CAR Quick QuoteCAR - Free Report) continued with its dismal bottom-line performance in second-quarter 2016, as earnings slumped year over year and marked the second consecutive negative surprise, mainly due to high per-unit fleet costs.

Despite the soft earnings, Avis raised its 2016 earnings and earnings before interest, taxes, depreciation and amortization (EBITDA) projections, alongside reaffirming its revenue guidance. This boosted investor sentiment, as was reflected by a 1.6% rise in the stock price in the after-market trading session.

The car rental company’s adjusted earnings came in at 63 cents per share, which plunged 25% year over year and lagged the Zacks Consensus Estimate of 84 cents. On a GAAP basis, the company’s earnings plummeted 71.6% to 38 cents per share.
 

On the positive side, net revenue of this Zacks Rank #3 (Hold) company advanced 3% to $2,243 million and surpassed the Zacks Consensus Estimate of $2,212.3 million. The robust top line was mainly driven by a 3% rise in rental days, while the overall results gained from worldwide volume growth and better pricing – particularly in the Americas region.

Adjusted EBITDA, however, declined 10.1% to $204 million, as adverse impact from higher fleet costs more than offset greater rental volumes and improved pricing.

Segment Performance

Americas reported 2% year-over-year revenue growth to $1,593 million, backed by a 2% volume increase coupled with a 1% rise in pricing (despite an impact of about 1% from currency headwinds), somewhat offset by a 6% hike in per unit fleet costs. Consequently, adjusted EBITDA declined 8% to $163 million in the quarter.  

The International segment’s revenues advanced 5% year over year to $650 million, as an 8% rise in volumes and a 1% drop in fleet costs compensated for the 4% fall in pricing, which included negative impact from currency movements of 1%. Adjusted EBITDA for the segment fell 7% to $57 million, mainly due to the same factors.

Financials

Avis Budget ended the quarter with cash and cash equivalents of $527 million, and total corporate debt of $3,530 million. As of Jun 30, 2016, the company’s shareholders’ equity was $339 million. During the first two quarters, the company generated $1,070 million as cash flow from operating activities.

During the second quarter, Avis repurchased nearly 3.5 million shares worth $100 million, including which it bought roughly 6.5 million shares for $180 million during the first half of 2016. Management continues to expect to generate free cash flow worth $450–$500 million in 2016, alongside making share buybacks of $300–$400 million.

Other Developments

Keeping pace with the technological advancements, Avis Car Rental announced a transformation in its overall car-renting process during the quarter, with the launch of the “Avis Now” feature for its mobile app. The “Avis Now” feature has been designed with customers’ inputs, as the key motive behind this solid innovation was to enhance consumer service and enrich their car-renting experience with the company.

Guidance

Management revealed that the company began the third quarter on a positive note, with pricing improving in Americas and fleet costs coming in line with expectations. Taking into account these factors and the anticipated benefits from Avis Now, the company raised the lower end of its earnings and EBITDA outlook.

Avis still anticipates sales to grow in a range of 3%–5% to $8.75–$8.9 billion in 2016. Currency headwinds are expected to have an impact of nearly $50 million on sales.

The company’s Americas segment rental days are estimated to grow 2%–3% (compared with 2%–4% projected earlier), while pricing is now expected to remain flat with negligible currency impact. Earlier, management anticipated pricing at this segment to dip nearly 1% on a currency-neutral basis. Further, the company now expects international revenue to increase 5%–8%, down from 7%–10% guided earlier. The updated International revenue outlook includes a 2% adverse impact from foreign currency.

Per-unit fleet costs for the total company are anticipated in the range of $285−$290 million per month, compared to about $280–$290 million expected earlier. While the company’s fleet cost guidance for the International segment has improved from the prior outlook, the Americas segment is now expected to witness higher fleet costs.

Per-unit fleet costs in the Americas for 2016 are now estimated to jump 5%–6% to $313–$316 million per month. For the International segment, per-unit fleet costs are now envisioned to drop in a range of 1%–3% to roughly $223–$227 million per month, including unfavorable currency impact of 1%.

Nonetheless, adjusted EBITDA is now projected to be in a band of $850−$900 million, from the range of $820–$900 million anticipated earlier. The updated guidance also includes a $20 million negative impact from foreign exchange movements.

Interest expense pertaining to corporate debt is expected to be nearly $205 million. The company’s non-vehicle depreciation and amortization costs guidance (excluding the amortization of intangibles related to acquisitions) is pegged at about $195 million.

The company’s effective tax rate in 2016 is estimated to be 39%, while diluted shares outstanding are projected to lie in a band of 93–95 million.

Based on the abovementioned expectations, the company lifted the lower end of its adjusted earnings guidance, envisioning the same in a range of $2.90–$3.30 per share, compared with $2.70–$3.30 expected earlier. Further, earnings are still expected to bear the brunt of currency headwinds to an extent of 12 cents a share.

Stocks to Consider

Some better-ranked stocks in the same industry include Acacia Research Corporation (ACTG Quick QuoteACTG - Free Report) , with a Zacks Rank #1 (Strong Buy), Core-Mark Holding Company, Inc. and SPS Commerce, Inc. (SPSC Quick QuoteSPSC - Free Report) , each carrying a Zacks Rank #2 (Buy).

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