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On Feb 20, 2013, we have upgraded our long-term recommendation on Avis Budget Group Inc. (CAR - Analyst Report) to Neutral, based on the company’s robust sales and improved earnings performance for the fourth quarter of 2012 and an encouraging 2013 outlook. The company carries a Zacks Rank #3 (Hold).

Why the Upgrade?

Avis Budget posted better-than-expected bottom line results for the fourth quarter of 2012, significantly narrowing its loss, benefitting from robust top-line performance as well as improved margins. Adjusted loss per share of $0.07 fared better than the Zacks Consensus Estimate of a loss of $0.08 and improved 50% from a loss of $0.14 delivered in the prior-year quarter.

Avis Budget’s net revenue increased 4% to $1.698 billion from $1.630 billion in fourth-quarter 2011, beating the Zacks Consensus Estimate of $1.641 billion.

Further, the company provided encouraging revenue and earnings outlook for 2013. The company expects full-year 2013 total revenue to come in between $7.6 billion and $7.8 billion, with adjusted earnings of $1.90–$2.45 per share.

It is to be noted that the company has a history of beating the Zacks Consensus numbers. The company has posted positive surprises in 3 of the last 4 quarters. The average positive surprise in the trailing four quarters comes to 78.7%.

The company continues to witness significant strength driven by the positive travel demand trends, while the integration of its Avis Europe and Apex Car Rentals businesses is also progressing smoothly. Moreover, it expects incremental cost savings from its Performance Excellence initiative as well as a five-point cost-reduction and efficiency improvement plan, which should boost profitability.

Avis Budget is aggressively expanding its operations through acquisitions and joint ventures. Moreover, in an effort to enhance its global footprints, the company is investing in other growing markets where car rental demands are speeding up. We believe that these strategies along with better customer support systems will boost the company’s top line.

However, we remain cautious over the stock’s future performance due to a possible rise in fleet costs in North America in 2013, which may adversely affect its margins. Additionally, the company remains prone to risks of foreign operations as well as heavy dependence on third party distribution channels.

Other Stocks Worth Considering

Other stocks worth considering in the business services industry are Hertz Global Holdings Inc. (HTZ - Snapshot Report), United Rentals Inc. (URI - Snapshot Report) and Performant Financial Corporation (PFMT - Snapshot Report). All these companies hold a Zacks Rank #2 (Buy).

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