Daily Trouble |
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<DAILY TROUBLE>
Tuesday, March 16, 1999
Budget Group Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BD)") else Response.Write("(NYSE: BD)") end if %>
Phone: 630-955-7419
Website: www.drivebudget.com
Price (3/15/99): $11 11/16
HOW DID IT FIND TROUBLE?
Some deals on wheels turn out to be real clunkers. Car and truck rental specialist Budget <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BD)") else Response.Write("(NYSE: BD)") end if %> has given its investors a bumpy ride in recent months, spending too much time staring in the rearview mirror to see the hazard just ahead.
With the bread-and-butter corporate travel sector in a rut, Budget could have been more prudent. At the very least, it could have eased up on the accelerator. Instead, the same company that swallowed up Cruise America, a troubled recreational vehicle retailer, a few years earlier gobbled up the country's second-largest truck rental fleet from Ryder <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: R)") else Response.Write("(NYSE: R)") end if %>.
All revved up with nowhere to go, shares of Budget went downhill without brakes. While its competitors were able focus on the industry problems, Budget had to assimilate its newest acquisition. The fourth quarter turned out to be a wreck. From higher expenses due to new marketing programs, to lower rental volume than expected, and with the cars that did get rented out returning with more miles and damage than usual, Budget simply blew its own budget.
Running on bald tires has meant nothing but flat times for this company.
BUSINESS DESCRIPTION
Budget owns the country's third-largest car rental agency and the second-largest consumer truck rental company. The company also sells the older cars in its rental fleet. Smaller ventures include RV rentals, commuter van pooling services, and airport parking lots.
FINANCIAL FACTS
Income Statement
12-month sales: $2,616.2 million
12-month income: $23.7 million*
12-month EPS: $0.73*
Profit Margin: 0.9%
Market Cap: $419.6 million
(*Excludes extraordinary items)
Balance Sheet*
Cash: $487.1 million
Current Assets: $914.5 million
Current Liabilities: $4,049.1 million
Long-term Debt: N/A
(*As of Sept. 30, 1998)
Ratios
Price-to-earnings: 16
Price-to-sales: 0.16
HOW COULD YOU HAVE SEEN IT COMING?
With its stock price stuck, is there any way to budge it? Get it? Budget? Well, the jokes here run about as dry as the company lately. Looking back at the last few quarters, based on financial performance alone, Budget may not have looked like such a lemon. The company reported upside earning surprises in both Q2 and Q3 1998.
However, the Ryder purchase only served to leverage a company in a sector going through some growing pains. It was clear to those who saw sympathy travel plays. Hoteliers Host Marriott <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMT)") else Response.Write("(NYSE: HMT)") end if %>, Starwood <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOT)") else Response.Write("(NYSE: HOT)") end if %>, and Patriot American <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %> were all taking a beating well before Budget's fourth quarter fell apart. If folks weren't staying at the hotels, they weren't renting cars to get there either. It was a domino effect that, while not always perfect, found one sector spelling disaster for another.
WHERE TO FROM HERE?
Through association, Budget should have bounced back earlier this month, but it didn't. On March 1, Hertz <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRZ)") else Response.Write("(NYSE: HRZ)") end if %> raised daily rates on non-contract rentals. The rate hike should have sent the industry players higher on the increased pricing flexibility. Shares of Budget fell that day.
The following day, Goldman Sachs upgraded the airline stocks. The presumption that air travel, which fits in snugly with car rentals at the airport, would once again be a profitable industry in which to invest should have had another favorable impact on a company like Budget. Nope. Another down day.
When a beaten-down company is immune to good news, the short-term prognosis can't be all that encouraging. It is a mixed sector now, with shares of Hertz kicking it into high gear, while others like Republic Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RII)") else Response.Write("(NYSE: RII)") end if %> and Budget are stuck in neutral. While neutral is better than the recent reverse, the bigger question to those riding shotgun here as shareholders is... where is Budget going?
Will Hertz or even Republic buy Budget? This month, Republic announced it would dump its waste management business in a spin-off to focus on its auto business, including Alamo Rent-A-Car and National Car Rental. So Hertz has the equity clout and Republic will come into some spending money, but will either one have Budget in its budget?
As an investor considering a purchase, it shouldn't matter. A shareholder should never get into a car with a stranger, and also should never buy into a company only for the sake of a potential takeover. You should look left, right, then left again before crossing the road.
Analysts' estimates, even hosed down after the recent corporate weakness, are still looking for Budget to earn $1.57 per share this year, and close to $2 per share next year. As Budget reported its dismal fourth quarter results, it did indicate that it sees "favorable volume and utilization trends" this quarter. So maybe it's back on course. The projections certainly make the company attractive on a valuation basis, though more conservative investors might want to make sure the turnaround is, in fact, taking place.
--Rick Aristotle Munarriz
([email protected])
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