Highlights:

The economy is suffering from anemic growth. In a time of a tightening Fed, it is only worsening and harshly affecting the auto sector.

New auto loan originations are collapsing, and delinquencies are trending up. All while used car prices have begun to decline, catching many off guard, and will only worsen from now.

Car rental companies, such as Avis Budget Group and Hertz, command massive fleets of used cars which they depend on for resale income and collateral for debt.

Avis is overwhelmed by creditors and other claimants. Dangerously so. And have razor-thin net margins to try and service these loans, of which $1.5 billion comes due before January 2019.

Avis generated no free cash flow for years and depends on yield-starved creditors to maintain its business, which is capital-intensive and sensitive to a weak economy, making it fragile

Excerpt:

. . . Taking a closer look at Avis’s capital structure, how would a softer economy and declining used car prices affect its business now?

Observing how Avis’s debt to equity has deteriorated is cringeworthy. Not that it was in particularly any good position two years ago. But now it has over $13.5 billion in debt sitting on top of a miniscule sliver of $141 million in equity. That is less than 1%.

Other than its debt, Avis’s Total Liabilities are truly breathtaking. And, as of June 2017, roughly $19 billion of total liabilities is balancing on top of $141 million in total shareholder equity.

In other words, less than 1% of Avis’s business is funded by shareholders. And, the other 99%? That comes from creditors and other claimants.

And, this is all against a total asset base that is depending on used car prices to perform.

Such extreme leverage leaves the company highly vulnerable to even the slightest external, or internal, shock.

If the remaining $141 million equity is wiped out, that doesn’t necessarily mean the company will cease to operate. While a red flag, negative equity companies can operate (total liabilities overweight total assets). But they need cash flow to meet their liabilities coming due. If the cash flow is inadequate, the company will end up ruined.

How is the earning power of Avis? Here are the last 11 quarters.

It is as I thought. During the booming car bubble years, it had beaten its Wall Street estimate with strong earnings.

But during the last five quarters, Avis has missed its estimates 4/5 times. The latest quarter, May 2017, being a wild miss. And, I expect this trend to continue as car prices sink and the economy contracts.

Still, don’t be fooled by Avis’s EBITDA (earnings before interest taxes depreciation and amortization) and EPS (earnings per share). These are almost meaningless for shareholders because all of what they make from EBITDA goes back into simply maintaining its business and huge rental fleet.

What truly matters to investors is free cash flow. This is the means for a company to pay dividends, buy shares back, and grow the company along with shareholder value.


But Avis makes 0 free cash flow. Therefore, it never has any free cash flow year-over-year growth. And, for long-term EBITDA not to generate any positive free cash flow is troubling. . .

Read the full article on my SeekingAlpha page