This Well-Known Stock Has Gained 4,370% Since the Recession… And it’s Still a ‘Buy’
Since the market crash of 2008, many investors have understandably become more conservative and have turned to safer alternatives — bonds, metals, real estate, blue-chip stocks or even plain old cash. Many others, however, plunged headlong into the mayhem, seeking to buy stocks at deep discounts with hopes to reap major profits on the rebound.
#-ad_banner-#I’m also guilty of this. I was bold enough to pick up shares of home improvement and building products company Masco Corp. (NYSE: MAS), and Indian car maker Tata Motors (NYSE: TTM) when both were about 50% cheaper than now.
But there is a well-known stock I wish I had bought when it was at its four-year low of 38 cents a share on Nov. 21, 2008, right at the height of the crisis. This stock has come roaring back and now trades for about $17 — good for an astounding 4,370% gain. An investment of $5,000 at 38 cents a share would be worth nearly $220,000 today.
I’m referring to Avis Budget Group Inc. (Nasdaq: CAR), the well-known motor vehicle rental company with services in 175 countries. As a highly cyclical stock, Avis really took it on the chin during the recession, when demand for rental vehicles crumbled. But business has greatly improved and I think Avis could more than double in the next few years or so.
While sales declined by an average of 2% a year during the recession years, they’re on pace to jump nearly 26% from 2011 to reach about $7.4 billion. What’s more, analysts are forecasting a very solid 7% growth rate overall during the next three to five years. And believe it or not, a recent European acquisition is one key factor in these estimates, even though the economy in that region is so weak right now.
The company acquired Avis Europe, a previously independent licensee that operated the Avis brand overseas. The $1 billion deal completed Oct. 3, 2011, was smart because of Avis Europe’s relatively close proximity to Taiwan, China and other fast-growing emerging markets. Rental vehicles are in high demand in those countries because of increased business travel. Although the deal closed only a year ago, it’s already profitable and should add $35 million to total revenue in 2012.
Business is particularly strong in China, where Avis Europe is the second-largest car-rental company. The company even plans to expand to 110 locations by the end of the year — nearly a 60% increase from the 70 locations it possessed in March. Car rentals is currently a $4 billion-a-year industry in China, and Avis management estimates it could grow to $8 billion within five years.
Another potentially successful revenue-generating strategy is the partnership with other travel industry leaders such as Germany’s Allgemeiner Deutscher Automobil-Club, which is Europe’s largest automobile club. This partnership, announced Feb. 23, gives about 18 million club members access to Avis services and special offers.
Avis is also focused on product and service upgrades, such as the virtual car rental technology already installed in about 25,000 of its vehicles. The technology lets customers reserve, pick-up and return rental vehicles entirely through their smartphones. On Sept. 25, Avis announced the start of its Preferred Select & Go service at 25 airports in the United States. Customers in this program can drive their pre-assigned vehicles directly from the airport, exchange their car for free or upgrade their vehicle for an additional charge.
Risks to Consider: With no dividend and three times the price volatility of the overall market, this stock is not for conservative investors. If the economy goes back into a recession, then the could crash hard again.
Action to Take –> Despite a huge run-up, Avis is still an excellent value. It trades for only seven times 2012’s projected earnings of $2.40 a share — less than half the industry average earnings multiple of 15.
What’s more, because Avis typically keeps rental fleet maintenance costs low, analysts project the earnings per share (EPS) growth rate will average about 12% during the five-year span starting at the end of 2011. At that rate of growth, earnings should hit $2.80 a share in 2016.
This suggests the stock could jump nearly 150% to $42 a share, assuming a price-to-earnings (P/E) ratio in line with the industry average ($2.80 x 15 = $42). Considering Avis’s fundamentals, such a P/E ratio is perfectly feasible in my opinion.