Avis Budget Group Inc. (NYSE:CAR) soared over 8% after news broke that hedge fund, Glenview Capital Management had announced that they had purchased 5.12% stake, or 5.4 million shares, in the rental car company. Avis Budget also saw a bump due to another announcement from rival rental car company, Hertz Global Holdings, which said they will be looking to raise their prices.
The rental car industry has been attracting a lot of activist attention lately, particularly at Hertz Global Holdings, Inc. Jana Partners announced 7% stake in the company in the months prior and even Carl Icahn has made an impact by getting Hertz CEO to step down, in favor of a candidate that could implement his action plan. Hertz is down -14.5% year to date, showing that there still is more time needed to implement and achieve results from Jana Partners and Icahn’s activism.
Avis Budget Group’s debt levels
Avis Budget, on the other hand, has had relatively little activist encounter, until now, due to the fact that the company is up almost 60% year to date and certainly appears to be in much greater competitive health than its peers. That being said, Avis Budget needs to have a better budget, because the company is drowning in debt. Debt to equity for Avis Budget comes to 17.53, with cash per share only a paltry 6.71. While the majority of its debt is long term (17.41 is long term), it still presents an opportunity for major issues down the road.
However, other than its absurd debt levels, Avis Budget looks pretty good. Sales, quarter over quarter, rose 6.10%, while earnings per share soared 71.60% during the same period. Forward price to earnings comes in at 17.53; earnings are expected to rise 26.34% next year and 29.45% over the next five years.
Overall Avis Budget is in a good position, however, I think teaming up with Glenview Capital is certainly the way to go in order to fix the major debt problems and just to refine the business and become more efficient. The rental car business is certainly competitive and it can be very difficult to stand out. In addition to competitors such as Hertz Global Holdings, Inc., Enterprise, Dollar Thrifty Automotive Group, Inc., Alamo Rentals, etc, Avis Budget has to worry about the “next generation” of car rentals in Zipcar and Uber. These alternative options could be an issue for the traditional rental car industry, forcing them to change and compete with Zipcar and Uber.
That is where activist investors will be able to assist Avis Budget. Activist companies have largely had positive results over the past few years, led by Carl Icahn, probably the most recognizable name in the activist investing field. It will probably take a couple of years, but will activist investors be able to change the rental car industry and make them more competitive and efficient to take on Zipcar and Uber?