Is Avis Budget Group Safe Despite Hertz’s Bankruptcy?

by Trefis Team
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Avis Budget Group’s stock (NASDAQ: CAR) has declined by 12% since the beginning of the year. The car rental industry is rattled, and Avis Budget is no exception. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders, resulting in minimal travel will continue to take its toll on the car rental industry. With Hertz filing for bankruptcy protection, the mere survival of car rental companies has come into question. While a bankruptcy doesn’t necessarily means a company going out of business, it can also include massive financial restructuring.

Trefis analyzes the potential Impact Of The Covid-19 Recession On Avis Budget Group with a focus on the company’s liquidity reserves and concludes that Avis Budget has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On Avis Budget Group’s Revenues 

  • We estimate if a recession persists through late Q2/early Q3 2020 the demand for Avis’ cars will remain low as people will be averse to travel. As a result, Avis Budget Group’s revenues could decline by about 30% in FY’20, on account of weaker demand, more focus on essentials and thereby a reduction in discretionary spending, and less travel.
  • In addition to that, the company derives nearly 70% of its revenues from the US, which has become the epicenter of the outbreak – recording the largest numbers of Covid-19 cases across the globe.
  • Even with the slow reopening of the economy as the lockdown is beginning to lift, social distancing measures may continue for months, which will impact people renting cars for outings.

Impact On Avis Budget Group’s Cash Flows

  • Avis’ cash flows are likely to plunge in FY2020 due to a steep fall in revenues and reduced profitability.  
  • The company will have to offer car rental at a discount to keep the cash flowing. 
  • Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
  • Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $2.6 billion in 2019 to $1.8 billion in 2020. Also, with expected capital expenditures of $1.8 billion for the year, FCFO-CapEx could be a mere $21 million in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $707 million, which is higher than compared to 2019. 
  • This is with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, Avis Budget Group can weather a recession through Q2 2020 and a 30% decline in revenues by cutting Capex, share repurchases, and suspending dividends. 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

An alternative scenario for Avis Budget Group’s cash flows with a 50% decline in revenue instead is detailed as a part of our full analysis.

While Avis seems to be in a relatively comfortable position, was Hertz’s bankruptcy expected?

 

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