By Investors of Avis Budget Group Inc. experienced their worst day in four years as the car-rental company announced that it had sold a record number of vehicles during the fourth quarter. However, this achievement occurred in a challenging market for used cars due to oversupply and a surge in interest costs.
Upholding Pragmatic Strategies Amidst Market Volatility
Chief Financial Officer Izzy Martins acknowledged the significant volatility in the used-car market but affirmed the company’s belief that exiting vehicles was a prudent move for their operations and beneficial to the overall industry. These actions were essential despite the unfavorable used-car market conditions.
Stock Declines Significantly
Avis’s stock (CAR) experienced a sharp decline of 22.7% during afternoon trading, placing it on track for its lowest closing price since October 7, 2021. The stock also faced its largest one-day percentage loss since plummeting 36% on March 18, 2020, at the beginning of the COVID-19 pandemic.
The drop in Avis’s stock price, amounting to $38.15, negatively impacted the Dow Jones Transportation Average (DJT), subtracting approximately 233 points. Consequently, DJT experienced a significant fall of 474 points, equivalent to a 2.9% decrease.
Seizing Opportunities and Meeting Demand
A major reason behind Avis’s record vehicle sales was the belief that the used-car market was normalizing. This prompted the company to take advantage of the situation and “harvest gains” by selling older models.
Additionally, several automakers delayed deliveries of new-model-year vehicles until after the peak summer season. As a result, Avis deemed it necessary to exit older vehicles in order to align their fleet size with market demand, as explained by Chief Executive Joe Ferraro.
Revenue and Profit Update
Despite a surprising decline in revenue, Avis reported fourth-quarter profit that exceeded expectations. The company managed to generate gains of approximately $50 million from the sale of vehicles during the quarter. However, this figure represented a 60% decrease compared to the prior year, despite a higher volume of vehicles being sold.
Impact of Increased Interest Costs
The decision to sell into a challenging market was motivated by a sharp 70% increase in monthly per-unit interest costs. These costs rose from $62 per vehicle a year ago to $106 per vehicle during the quarter.
As Avis Budget Group Inc. faces the repercussions of the oversupply in the used-car market and the surge in interest costs, the company is aligning its operations with the changing landscape while seeking profitable outcomes.
Avis Reports Increased Depreciation and Fleet Costs
Avis recently announced that gross depreciation per vehicle has exceeded previous expectations, rising from the initial estimate of approximately $300 to $306. By the end of the first quarter, this figure is projected to reach $325. Additionally, the per-unit fleet cost per month has surged by 53.9% to $277.
Considering the rising core input costs, including vehicle costs and financing expenses, Avis is emphasizing the importance of efficiently matching vehicle supply with demand. According to the company’s spokesperson, Ferraro, this measure is crucial, especially in the current economic climate.
Addressing concerns about Avis’s electric vehicle (EV) fleet and demand for EVs, Ferraro reassured stakeholders that the company has taken a conservative approach due to uncertain rental demand. Consequently, Avis has comfortably managed its supply-and-demand dynamics for EVs, experiencing no unusual obstacles or maintenance-related challenges.
Regarding financial performance, Avis reported a decline in net income for the fourth quarter. Net income fell to $260 million, or $7.10 per share, from $424 million, or $10.10 per share, in the same period last year. Although there was a drop in revenue, slipping 0.3% to $2.76 billion from $2.77 billion, the average number of rental days increased by 5.3% to 42.03 million. However, revenue per day decreased by 5.3% to $65.78.
Despite these results, Avis continues to maintain a strong rental fleet with a growth of 11% to 518,928 vehicles. However, there has been a slight decline in vehicle utilization, dropping from 68% to 65%. It is essential to note that Avis’s stock has experienced a decline of 30.2% over the past three months, while its competitor, Hertz, has seen a 6.5% decrease. Meanwhile, the S&P 500 index has shown a 12% increase.
In conclusion, Avis faces the challenge of managing increased depreciation and fleet costs amid rising core input expenses. Additionally, the company is maintaining a cautious approach with its EV fleet due to uncertainty in rental demand. Despite the decline in net income and revenue, Avis continues to expand its rental fleet, although vehicle utilization has slightly decreased.
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