Recovering from the back-to-back earnings misses in the last two quarters, Avis Budget Group Inc. (CAR Quick QuoteCAR - Free Report) came out with record third-quarter 2016 results, wherein both earnings and sales grew year over year, alongside topping estimates.

Results were mainly backed by strong pricing in the Americas region coupled with the company’s profit-boosting efforts. These also helped Avis to generate its highest quarterly adjusted EBITDA margin to date. The robust results were enough to drive investor sentiment, as reflected by a 1.2% rise in the stock price in the after-market trading session.

Q3 Highlights

The car rental company’s adjusted earnings came in at $2.47 per share, which surged 25% year over year and came in significantly ahead of the Zacks Consensus Estimate of $2.34. On a GAAP basis, the company’s earnings rose 29% to $2.28 per share.

Further, the company reported record net revenue of $2,656 million in the quarter, which advanced 3.1% year over year and also surpassed the Zacks Consensus Estimate of $2,622 million. The solid top line was mainly driven by a 4% rise in rental days at the International region and a 2% improvement in pricing in the Americas region.

Adjusted EBITDA rose nearly 9% to $469 million, fuelled by enhanced overall rental volumes and better pricing in Americas, somewhat offset by higher per-unit fleet expenses. The adjusted EBITDA margin expanded 100 basis points to 17.7%.

Segment Performance

Americas reported 3% year-over-year revenue growth to $1,821 million, backed by a 2% increase in pricing and rental days each, somewhat offset by a 2% hike in per unit fleet costs. Consequently, adjusted EBITDA jumped 10% to $306 million in the quarter.  

The International segment’s revenues advanced 4% year over year to $835 million, thanks to a 4% rise in volumes, partly negated by a 2% drop in pricing and a 2% rise in per-unit fleet costs. Adjusted EBITDA for the segment rose 7% to $179 million on the back of greater rental volumes, reduced marketing costs and favorable currency movements, partly offset by unfavorable pricing.

Financials

Avis ended the quarter with cash and cash equivalents of $985 million, and total corporate debt of $3,866 million. As of Sep 30, 2016, the company’s shareholders’ equity was $474 million. During the first three quarters, the company generated $2,101 million as cash flow from operating activities.

During the quarter, Avis repurchased nearly 3.1 million shares worth $110 million, including which it bought roughly 9.5 million shares for $290 million as of Sep 30, 2016. Management continues to expect to generate free cash flow worth $450–$500 million in 2016, while it now anticipates making share buybacks of $370–$400 million, compared with the previous plan of $300−$400 million.

Other Developments

Avis inked a deal to acquire France Cars, in Sep 2016. A privately-held car-rental company, France Cars makes nearly €60 million in vehicle rental revenues on an annual basis. Notably, the buyout of this France-based company will add roughly 8,000 cars, vans and light trucks to Avis’ existing fleet, thus helping it expand in the French region. The company anticipates this buyout to conclude by the end of this year.

Guidance

Management remains impressed with the company’s third-quarter results and expects the positive pricing in the Americas to continue. However, owing to weaker-than-anticipated demand in the Americas and Europe, the company is on track to right-size its existing fleet. Consequently, management adjusted its 2016 outlook, where it tweaked its overall revenue, adjusted earnings and adjusted EBITDA forecast.

Avis now anticipates 2016 sales to grow 3% to $8.75 billion, including adverse currency impact of around $40 million. Earlier, the company projected revenues for 2016 to grow in a range of 3%–5% to $8.75–$8.9 billion, with a negative currency impact of nearly $50 million.

The company’s Americas segment rental days are now estimated to grow 2% (compared with 2%–3% projected earlier), while pricing is expected to remain flat with no currency impact. Further, the company now expects international revenue to increase 6%, compared with 5%–8% growth guided earlier. The updated International revenue outlook includes a 1% adverse impact from foreign currency, versus 2% projected earlier.

Per-unit fleet costs for the total company are now anticipated to be around $285 million per month, compared to a range of $285−$290 million expected earlier. Per-unit fleet costs in the Americas for 2016 are now estimated to jump 5% to $312 million per month, compared with the previous guidance of a 5%–6% increase to $313–$316 million. For the International segment, per-unit fleet costs are now envisioned to drop 0.9% to $227 million per month, compared with the previous projection of a 1%–3% decline to roughly $223–$227 million. The updated International fleet cost guidance also includes unfavorable currency impact of 1%.

Adjusted EBITDA is now projected to come on the lower end of its previously guided band of $850−$900 million. This still 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 93–94 million.

Based on the abovementioned expectations, the company expects its adjusted earnings per share to be $2.93, which is close to the lower end of its previously announced range of $2.90–$3.30 expected earlier. Further, earnings are expected to bear the brunt of currency headwinds to an extent of 11 cents a share.

Zacks Rank

Avis currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Acacia Research Corporation (ACTG Quick QuoteACTG - Free Report) , SPS Commerce, Inc. (SPSC Quick QuoteSPSC - Free Report) , with a Zacks Rank #1 (Strong Buy) each and Core-Mark Holding Company, Inc. , with a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Acacia Research has to its credit an impressive earnings trend as the company delivered back-to-back positive earnings surprises in the last two quarters. Moreover, its long-term EPS growth rate of 20% and positive estimate revisions over the past seven days help it stand strong against the industry.

SPS Commerce, with a long-term EPS growth rate of 22.5%, has seen positive estimate revisions for 2016, over the past seven days. The company also flaunts a spectacular earnings surprise history, with a beat delivered in each of the trailing four quarters.

Core-Mark Holding delivered positive earnings surprises in the last three quarters and has witnessed positive estimate revisions for 2016 over the past 60 days.

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