Morton Fox (mortonfox) wrote,
Morton Fox

Fundamental Analysis Friday

Wooden Bridge

The Sleuth sent me a stock recommendation this afternoon that wasn't as well-researched as their usual standards.

Here's their case for saying that Avis Budget (NYSE:CAR) is cheap:
Avis Budget             Stock   Industry
Price / Earnings        3.2     28.2
Price/ Book             .2      4.9
Price / Sales           .1      4.9
Price/ Cash Flow        .8      20.1
Source: Morningstar
In addition, The Sleuth stated that the company pays $4.40 per share in dividends per year, for a dividend yield of over 20%!

Well, I was intrigued, so I did a bit of digging. It turns out that Avis Budget is one of the four pieces resulting from Cendant's breakup earlier this year. Cendant actually is a familiar name to me even though I haven't taken a look at that company for the better part of a decade. Back in 1998, I got some Cendant because they had accounting problems and the stock was temporarily undervalued. Of course, I was taking a bit of a risk back then because I wasn't completely sure of their revised numbers either, but I pocketed a 50% gain from that trade so it worked out okay.

Anyway, the numbers above are skewed because most financial sites are still calculating the ratios based on Cendant's numbers, not the numbers of the portion of the company that became Avis Budget. But we can fix that now because they have posted their 2006 3rd quarter statements here. (Note: This is preliminary. They're expected to post revised numbers on Nov 20 because of additional breakup costs.)

Net income for 9 months was $71 million. Annualizing that gives $94.7 mil. Dividing that into the market cap ($2.1 billion) gives a P/E of about 22.

The book value is the total assets ($13,442 mil) minus intangibles ($2,935 mil) and liabilities ($7,361 mil), which is $3,146 mil. Dividing that into the market cap gives a P/B of 0.7.

Revenues were $4,311 mil for 9 months. Annualizing that and dividing into the market cap gives a P/S of 0.4.

Cash flow for 9 months was $1,111 mil. Annualizing that and dividing into the market cap gives a P/CF of 1.4.

So a more realistic comparison table would be as follows:
Avis Budget             Stock    Industry
Price / Earnings        22       28.2
Price/ Book             0.7      4.9
Price / Sales           0.4      4.9
Price/ Cash Flow        1.4      20.1
That's still pretty good in comparison to the sector (the P/E is actually a bit lower if you remove the separation cost, which is a one-time charge), but not as jaw-droppingly cheap as it looked before. Even so, I would wait a few more quarters before deciding because these numbers depend in part on restated numbers from before the breakup.

And oh, the $4.40 dividend? According to their FAQ, they currently do not expect to pay a dividend. Well, so much for that.

Anyway, this is not to rag on The Sleuth (although I am ragging on them a little), but to make the point that you need to check the numbers on your own. Do not invest blindly based on stock tips from investment newsletters, Jim Cramer, or your barber. They can all make mistakes.

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