Avis Budget Downgraded

Following a dismal fourth-quarter 2011 bottom-line performance by the leading general-use vehicle rental company, Avis Budget Group Inc. ( CAR - Analyst Report ) , we have revised our long-term rating on the stock. We have downgraded our long-term recommendation on Avis Budget to Neutral from Outperform after the company’s fourth-quarter 2011 net loss widened more than two folds to 14 cents per share from the prior-period.

The increase in quarterly loss was primarily due to increased financing costs resulting from Avis Europe acquisition. However, Avis Budget’s fourth-quarter 2011 revenues surged 33%, driven by increased rental volume.

Further, Avis Budget pointed out that it is in tune with its integration plans for Avis Europe, and expects its 2012 results to gain over $35 million from the integration-related synergies coupled with its strategic initiatives. Further, adjusted EBITDA during the quarter increased 19% from the prior-period level due to leveraged direct operating expenses.

Avis Budget is the leading general-use vehicle rental company in North America, Australia and New Zealand. A formidable network of more than 10,000 rental locations and 350,000 vehicles enable the company to strengthen its well-established position in a highly competitive vehicle rental industry.

Moreover, in streak to expand its geographical presence, the company is pro-actively looking for strategic acquisitions and alliance opportunities to boost its growth. The recent acquisition of Avis Europe is one of the major steps to enhance its operational footholds in global market, especially in China and India. Avis Budget has launched its own sales force in the European region as a means to own and leverage the local opportunities and customers to drive inbound business.

In addition, Avis follows a core global strategy of partnering with leading travel brands to expand its customer reach while creating additional demand. Recently, the company’s partnership with leading German automobile club Allgemeiner Deutscher Automobil-Club testifies its commitment to its global strategic initiatives, which is based on the value of its brands and its ability to provide synergies to its partners, benefitting their brands and businesses.

However, Avis Budget heavily relies on its centralized information system, including reservation system, rental and sales transactions, managing fleet of vehicles, etc. The company's performance may be hurt by a major disruption in communication or centralized information networks.

Moreover, approximately 47% of Avis Budget’s domestic car rental reservations came through third-party distribution channels. Consequently, any disruption and termination of relationships or reduction in transaction volume with such channels may have an adverse impact on the company’s financial condition and results of operation.

Avis Budget’s financial performance may be substantially affected due to its significant presence in international market, which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.

Above all, the company faces intense competition from other established players, such as Hertz Global Holdings Inc. ( HTZ - Snapshot Report ) and Dollar Thrifty Automotive Group Inc. ( ) . Consequently, the company may face challenges to maintain the same level of operating performance.

Currently, Avis Budget has a Zacks #4 Rank, implying a short-term Sell rating on the stock.