Monday, June 30, 2014

Investing in Automobile Rentals Earnings Growth

When one thinks of exciting industries, sectors like biotechnology or social media probably come to mind. One segment that probably isn’t at the forefront of these types of lists though is undoubtedly the rental car business.

While loaning out cars may not be very high tech or exciting, the industry can provide investors with big profits. Take for example Avis Budget Group (CAR), a stock in this often-overlooked space that has surged as of late and could be poised for more gains ahead too.

Avis Budget Group in Focus

CAR is based in New Jersey and provides car and truck rentals—as well as car sharing services—to businesses and consumers across the globe. And while CAR may not have the most interesting business model, it has certainly benefited from a broad recovery as shares have added close to 45% in 2014 alone.

In fact, shares of CAR have pretty much doubled in the past one year period, easily crushing the S&P 500 in the same time frame. But given these kinds of performances, some might be wondering if CAR can maintain this momentum, or if it is due for a crash.

While there is no way of knowing for sure, recent activity in terms of analyst earnings estimate revisions is certainly promising and could suggest that strength is ahead for CAR in the near term.

CAR Earnings Estimates

Recent changes to earnings estimates by covering analysts have been almost universally positive in the past two months for CAR. Not a single estimate has gone lower for the current year or the next year time frames, suggesting universal agreement from analysts on this front.

The magnitude of the estimate revisions for these time periods has also been impressive, as the consensus estimate for the current year has risen from $2.69/share 60 days ago to $2.88/share today. Meanwhile, for the next year period, estimates have risen from $3.50/share to $3.65/share, suggesting that the longer term picture looks bright as well.

The great news about these rising estimates is the growth rate that analysts are baking in for this stock. 30% earnings growth is now projected for the current year, while 2014’s projected growth of 26.7% is not too shabby either. And given that the forward PE for CAR is just a dash over 20, it is pretty reasonable to assume that Avis Budget Group has not become overbought and that more gains could be ahead for this solid company.

Bottom Line

For these reasons, we have assigned CAR a Zacks Rank #1 (Strong Buy), and are looking for more outperformance from this company in the weeks ahead. The stock also has a positive Zacks Earnings ESP, and when this is coupled with a strong Zacks Rank, positive earnings beats tend to follow, so the upcoming earnings report could be a strong one.

Plus, the security is a best-in-breed company, as others in the space such as Hertz (HTZ - Snapshot Report) have weak Zacks Ranks right now, suggesting it is the best way to play the space right now. So if investors are looking for a top car rental company, they shouldn’t look any farther than CAR, as this stock could definitely continue to march higher in the second half of the year as well.

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