Most investors dream of picking that one stock that makes them a fortune.
My guess is those who attempt this typically do so by trying to find the Next Big Thing. That is, they buy stock in a young business doing something that seems new and revolutionary like a novel disease treatment, more intelligent robots, or a unique alternative energy source.
So who would have ever predicted one of best stocks of the past half decade or so would belong to a well-known, decades-old firm offering mundane services?
When I profiled this stock in October 2012, it was already recovering strongly from the mauling it took during the financial crisis, having gained 4,370% to $17 a share from a low of $0.38 in late 2008. Now the stock is trading around $57 -- 234% higher than when I first covered it and nearly 14,000% above its recession low.
Anyone who put $5,000 into this stock back in late 2008 and held on would have close to $700,000 today.
The company behind the stock, vehicle rental firm Avis Budget Group (NYSE: CAR), may not be into the Next Big Thing -- or it just might be, as I'll explain later. But even after a 150-fold rise in its stock, Avis has plenty of catalysts for yet more outperformance in the future.
A major one is the resumption of revenue growth after years of stagnation. Annual revenue, which was stuck in the $5.7 billion to $6 billion range from 2006 through 2011, has since broken out, spiking more than 37% to the current level of more than $8.1 billion.
As you might expect, the main growth driver has been the firm's namesake premium car rental service for individuals and businesses, with 2,650 locations worldwide and 66% of total revenue. Sales for this segment, which are about evenly split between commercial and leisure rentals, appear set for more strong expansion based on recent events.
In April, for instance, Avis renewed a long-standing exclusive partnership with British Airways to provide the airline's customers with car rentals. As before, these customers will receive discounts on Avis rentals, as well as more-efficient vehicle reservation methods such as reserving directly with a British Airways agent. To further enhance service, Avis recently opened a location at British Airways' flagship terminal at London Heathrow Airport.
On June 3, the Federal Trade Commission approved the purchase of 12 locations from bankrupt rival Advantage Rent a Car by Avis Budget, the business segment serving more value-conscious customers. The acquisition cost just $6 million, barely 1% of the $841 million in cash Avis had at the end of the first quarter, but should generate revenue of around three times that each year.
All told, Avis Budget contributes about one-quarter of Avis's total sales. And with consumers still in penny-pinching mode, demand for budget rentals should be particularly strong going forward.
ZipCar, the global car sharing service Avis bought in March for $500 million, could do exceptionally well. Indeed, as I suggested earlier, it could be something of a Next Big Thing in transportation, even though it currently accounts for only about 3% of Avis's total revenue.
That's because the popularity of car sharing has been exploding as consumers seek cheaper alternatives to owning their own vehicles. And as the world's #1 car-sharing company, with roughly 860,000 members and locations in 20 cities in the U.S., Europe and Canada, ZipCar is well-positioned to profit from the rapid rise of this industry.
In dollar terms, car sharing is currently about a $400 million industry worldwide. With annual revenue of nearly $250 million, ZipCar has more than a 60% market share. So if car sharing progressively balloons into a $10 billion industry (as Avis projects), the firm could be sitting on more than a $6 billion-a-year opportunity, assuming ZipCar can maintain its current level of market dominance.
Although still precarious, Avis's financial position has improved some since the financial crisis. Cash, for instance, is now almost $700 million -- nearly three times 2008 levels. Plus, Avis just refinanced nearly $400 million in debt. With lower interest payments and better liquidity, Avis has increased its stock repurchase authorization to $300 million from $200 million and has already bought back $135 million of its shares under this program.
As I cautioned in 2012, Avis operates in a cyclical industry and could easily see its stock nosedive due to pressure from any number of risks. That said, the firm still has tremendous growth potential, and it doesn't hurt that the reputation of rival Hertz Global Holdings (NYSE: HTZ) is taking a pounding because of accounting errors that could result in restatement of several years of financial results.
Risks to Consider: Besides heavy competition, Avis faces operational risks such as rising fleet or fuel costs, as well as a weakening of consumer demand if the economy worsens. Also, as I noted, the firm could be in much better financial shape. For instance, Avis' debt-to-equity ratio is around 15, compared with an industry average of 3. Annual free cash flow has been negative for more than seven years, ranging from minus $9.3 billion to minus $10.4 billion since 2006.
Action to Take --> At about $60 a share, Avis trades around 21 times projected 2014 earnings per share (EPS) of $2.83 and 17 times projected 2015 EPS of $3.55. With consensus estimates for a 25% growth rate during the next five years, EPS could rise to $8.64 by the end of 2019.
I wouldn't count on the stock maintaining its excessively high historic price-to-earnings (P/E) ratio of 51, though. But even a P/E ratio in line with the current industry average of 23 implies the potential for the stock price to more than triple to nearly $200 during the next five years. Thus, at current valuations, Avis remains a buy for investors with high risk tolerance.