Investment: Economic gloom fails to dent Avis car rentals

Click to follow
The Independent Online
IF PREVIOUS economic cycles are anything to go by, the car rental industry should be getting ready to slam on the brakes.

Renting out Ford Mondeos to travelling executives is a cyclical business. Given the general economic slowdown - not to mention the problem of plunging used car values - it's no surprise shares in Avis Europe have dropped by a third since the beginning of June.

But hang on. Interim figures from the group, released yesterday, show little evidence of a slowdown. In the half year to the end of June (Avis is in the process of switching its financial year end) revenues rose 8 per cent to pounds 252m while operating profits were up by a quarter.

Avis pushed through its first price increase in three years while increasing volumes by a tenth. Improved productivity lifted margins by almost three percentage points to 19.5 per cent.

On resale values, Avis doesn't worry because it sells over 80 per cent of its cars back to the manufacturer at an agreed price.

It looks as if, true to its corporate slogan, Avis is trying harder.

Longer-term trends are also working in its favour. Helped by its geographical spread, the company is doing exclusive deals with travel groups such as Airtours to provide rental cars for holidaymakers. It is also supplying replacement cars to people who suffer a roadside breakdown.

Meanwhile, chief executive Alun Cathcart thinks city dwellers will increasingly turn to renting cars rather than bothering with the expense of buying one.

On upgraded full-year profit forecasts of pounds 94m the shares, up 22p to 223.5p yesterday, trade on a forward earnings multiple of 18.

Avis looks capable of yearly profit growth of 10 per cent for the foreseeable future. The recent weakness in the share price is an opportunity. Buy.