COVID Recession: A 25% Revenue Decline For Avis Budget Group Would Consume $1 Billion In Cash In 2020

April 14th, 2020 by Trefis Team
CAR: Avis Budget logo
CAR
Avis Budget

Avis Budget Group (NASDAQ: CAR) stock has declined by over 50% since January 31st. A COVID recession will impact the company’s revenues, cash flows, and ability to repurchase stock. We estimate that a recession that persists through late Q2 will reduce Avis Budget Group’s revenues by 25% from $9.2 billion in 2019 to $6.9 billion in 2020. 

Net Income Impact

  • If Revenues decline to $6.9 billion and fixed costs remain largely flat year-over-year at $8.7 billion, the company could post a net loss of about $2.1 billion.

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Cash Flow Impact

We’ve analyzed the cash flow impact of the scenario above and assess that this revenue reduction can be mitigated by reducing capital expenditures by 50%, and eliminating share repurchases. In such a scenario, we estimate that:

  • Free cash flow from operations (FCFO) will go from $2.6 billion in 2019 to $0.2 billion in 2020
  • Capital expenditures will decrease from $2.4 billion in 2019 to $1.2 billion in 2020
  • FCFO-CapEx will be -$1.0 billion in 2020

Cash Balance Impact
The company had about $0.9 billion in cash and cash equivalents at the end of 2019. Considering that Free Cash Flows are likely to be negative this year, the company indicated that it had accessed about $1.1 billion in cash, by tapping into surplus equity in its vehicle fleet. This should give the company sufficient liquidity to operate through the downturn. The company had a total of about $14.5 billion in long-term debt (including related party debt) as of 2019, with interest costs coming in at $509 million.

Takeaway
Avis Budget Group can weather a recession through late Q2 2020 and the 25% decline in revenues by cutting capital expenditures, share repurchases, and going ahead with its planned ~$1 billion cash raise.

The timing of recovery will hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

For an alternative scenario with 40% change in revenue instead, see our complete dashboard analysis.

Scenario Footnotes:

Additional assumptions for the scenario described above:

  • Share repurchases stopped
  • No additional financings
  • All variable operating expenses change proportionally with revenue
  • Non-operating expenses remain flat with 2019 (including any interest expenses if present)
  • 2019 tax rate applied to 2020 scenario
  • Pro rata cash balance does not reflect drawdowns on existing revolvers that may have already happened or other financing events.

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