March 4, 2015

Avis Budget Group, Inc. Current Recommendation

NEUTRAL

Prior Recommendation

Outperform

Date of Last Change

10/21/2014

Current Price (03/03/15)

$61.69

Target Price

$65.00

(CAR-NASDAQ) SUMMARY Avis ended 2014 on a strong note with better-thanexpected fourth quarter earnings and revenues. The company s expansion strategy has been in full swing via alliances, acquisitions and joint ventures. Also, Avis has been focused on expanding its Budget brand forward, taking its multi-brand strategy to the next level. Further, sustained productivity growth, positive volume growth, improved pricing and potential revenue-generating synergies from its various acquisitions bode well. However, the company s significant presence in the global markets exposes it to the ongoing unfavorable foreign currency translations, which is likely to weigh on its revenue growth, adjusted EBITDA and earnings in 2015. Moreover, rising fleet costs in North America remains a concern.

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

$69.52 $45.31 27.49 2.87 1,831,761

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

106 $6,561 6.22 N/A 2

Annual Cash Dividend Dividend Yield (%)

$0.00 0.00

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

13.9 46.0 N/A

P/E using TTM EPS

20.8

P/E using 2015 Estimate

17.3

P/E using 2016 Estimate

15.2

Zacks Rank *: Short Term 1 3 months outlook

3 - Hold

* Definition / Disclosure on last page

© 2014 Zacks Investment Research, All Rights reserved.

Average,

Risk Level * Type of Stock Industry Zacks Industry Rank *

Large-Growth Business Svcs 164 out of 267

ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $)

2013 2014 2015 2016

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

1,691 A

2,002 A

2,395 A

1,849 A

7,937 A

1,862 A

2,194 A

2,542 A

1,887 A

8,485 A

1,929 E

2,280 E

2,661 E

1,975 E

8,845 E 9,294 E

Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1 (Mar)

2013 2014 2015 2016

Q2 (Jun)

Q3 (Sep)

Q4 (Dec)

Year (Dec)

$0.08 A

$0.50 A

$1.48 A

$0.15 A

$2.20 A

$0.16 A

$0.68 A

$1.91 A

$0.23 A

$2.96 A

$0.17 E

$0.82 E

$2.20 E

$0.37 E

$3.56 E $4.07 E

Projected EPS Growth - Next 5 Years % (Note: Qtly fig. may not add up to annual fig. due to round off.)

www.Zacks.com

10 S. Riverside Plaza, Chicago IL 60606

N/A

OVERVIEW Avis Budget Group Inc. provides vehicle rental services through a network of approximately 10,000 car and truck rental locations in the U.S., Canada, Australia, New Zealand, Latin America, the Caribbean, and parts of Asia. The company was founded in 1946 under the name Cendant Corp., which it later changed to Avis Budget Group in 2006 after a spinoff. The New Jersey-based company offers car rental services to the commercial and leisure segments of the travel industry under the Avis brand, as well as to the price-conscious car rental segment under the Budget brand. Avis Budget also offers truck rentals and related services to consumers and light commercial users under the Budget truck brand. The company currently reports its operating results under three segments: Domestic Car Rental is the flagship segment, which provides car rentals and ancillary products and services in the U.S. The International segment offers vehicle rentals and ancillary products and services in Argentina, Australia, Canada, New Zealand, Puerto Rico and the U.S. Virgin Islands. The Truck Rental segment provides rentals and services to consumers and light commercial users in the U.S. Effective Jan 1, 2015, Avis Budget operates in two operating regions namely, the Americas and International.

REASONS TO BUY Aggressive Expansion Strategy Bodes Well for Future Growth: Avis Budget s expansion strategy has been in full swing via alliances, acquisitions and joint ventures. Moreover, in an effort to enhance its global footprint, the company invests in other growing markets where car rental demands are increasing. Some of the recent ventures to expand globally include it acquisition of Italy s leading car rental company- Maggiore; the introduction of its 12th rental station in Singapore, Asia; its deal to buy licensee for both Avis and Budget brands for Norway, Sweden and Denmark in Scandinavia; expansion of its Apex brand s operations to Costa Rica and Cayman Islands, its partnership with Inspirato, acquisition of Zipcar and its partnership with PortAventura, a popular theme park and resort in Spain. Also, the company fortified its fleet with the addition of Maserati s Ghibli at select locations. We believe that these strategies, along with better customer support systems, will boost the company s top line. Expanding Budget Brand to Drive Top-Line Growth: Looking at the recent series of events, it seems that Avis Budget intends to aggressively increase the number of company-operated locations in fast-growing markets. The company has been focused on expanding its Budget brand forward, taking its multi-brand strategy to the next level. Recently, Avis bought the Budget Car Rental licensee for southern Africa in a deal with Barloworld, prior to which it bought the Budget licensee for Southern California and Las Vegas. Further, it had acquired the licensee for Budget Car & Truck Rental in Edmonton, Alberta, Canada in 2014, apart from directly starting operations of a Budget Car Rental brand in Portugal. We believe that these moves will facilitate Avis Budget to enhance the Budget brand loyalty through better utilization of the licensee s established presence, which will ultimately boost its top line. Fundamental Growth Drivers: We see strong U.S. demand trends for Avis Budget as travel volumes continue to do well. Sighting strong travel trends for both leisure and commercial travelers Equity Research

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and projecting a sustained expansion of travel trends, we believe that the acquisition of Avis Europe will enhance Avis Budget s operational footholds in global markets. We believe that the company s fundamental drivers, such as sustained productivity growth and improved pricing- resulting in better margins, positive volume growth, and potential revenue-generating synergies from the Avis Europe acquisition bode well. This becomes evident from the company s fourth quarter 2014 results, where the company delivered better-than-expected earnings and revenues coupled with solid margins, eventually ending 2014 and embracing 2015 on a solid note. Digital Investment to Drive Long-Term Growth: Avis Budget has always been innovative and was the first in the vehicle rental industry to adapt to the recent tech era, wherein companies are exploring the online and mobile portals to enhance sales and margins. The company s latest achievement in this area was the launch of a mobile app that enhances user experience, ensures greater transparency and mobile access to Avis products and services targeted to boost the company s operating margin in the long run. In an earlier venture to turn tech-savvy, the company adopted the Google Wallet app to help customers save time and provide ease in bookings. Looking ahead, the company plans to make further investments in technological advancements.

REASONS TO SELL Rising Fleet Cost in North America May Curb Margins: The company continues to progress on its disciplined pricing initiatives and expects them to offset persistently rising North American business fleet costs. However, we believe that this would be cumbersome and time taking, owing to the company s long-term agreements with corporate and cut-throat pricing strategy adopted by its competitors. Dependence on Third Parties: A major portion of Avis Budget s domestic car rental reservations come through third-party distribution channels. Consequently, any disruption and termination of relationships or reduction in transaction volume with such channels may have an adverse impact on the company s financial condition as well as its operational results. Risk of Operating Globally: Avis Budget s significant presence in the international market exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits. As a result, Avis expects its 2015 revenue, adjusted EBITDA and earnings per share to be adversely impacted by the ongoing negative currency movements.

RECENT EVENTS Avis to Buy Maggiore to Enhance Italian Operations

Mar 2, 2015

Avis Budget has been aggressively increasing its presence in fast-growing markets, through alliances, joint ventures and acquisitions. Continuing with this trend, the company announced that it has inked a deal to buy one of Italy s leading vehicle rental businesses, Maggiore Group. The deal, which is slated to close in the second quarter of 2015, will cost Avis Budget nearly $170 million. The company plans to sponsor this with available cash or/and additional corporate debt. Maggiore has been operating in Italy since 1947, and currently boasts a network of over 140 locations. Its established presence and recognition for both car and van rentals in the country are likely to enhance Avis Budget s Italian operations. Avis, which has been operating in Italy for 58 years now, is all set for Equity Research

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Maggiore s integration into its business as it finds Italy to be a profitable location, particularly during the peak summer season. Further, Avis remains focused on expanding its Budget brand, taking its multi-brand strategy to the next level. After the acquisition of Maggiore, Avis plans to introduce a Budget-Maggiore dual-branding plan, which will not only speed up the company s Budget Car Rental development, but will also augment Maggiore s existing strength in Italy. Van rental services will continue to be offered by the combined businesses through Maggiore's renowned AmicoBlu brand. Overall, this agreement is likely to generate synergies for both Avis and Maggiore, as both companies have a common customer-centric approach. On the one hand, it will develop and solidify Maggiore s brand in the international market in the long run. On the other hand, it will enable Avis to leverage Maggiore s well-built customer relations and enhance volumes from Italy to the rest of the world. Coming to financials, the full integration of these businesses is anticipated to enhance Avis Budget s annual revenue by roughly $160 million, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by $30 million and consequently drive its earnings.

Avis Budget Beats on Q4 Earnings, Initiates 2015 Outlook

Feb 18, 2015

Avis Budget reported fourth-quarter 2014 adjusted earnings per share of $0.23, which grew 53% from the prior-year earnings and surpassed the Zacks Consensus Estimate of $0.18. Earnings benefited from the company s ongoing key strategic initiatives and increased pricing trends in North America. On a reported basis, including certain one-time items, the company reported earnings per share of $0.21 in the fourth quarter, contrary to a loss of $0.26 per share in the year-ago quarter. Avis Budget s net revenue increased 2% year over year to $1,887 million in the quarter but fell short of the Zacks Consensus Estimate of $1,942 million. The year-over-year growth was primarily driven by 6% rise in rental days and improved pricing in North America, partly offset by negative foreign currency translations. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter increased 13% to $129 million also driven by higher rental volumes and better pricing in North America, partly offset by increased fleet expenses. Segment Performance North American car rental revenues grew 7% year over year to $1,247 million in the quarter, primarily on the back of a 6% volume expansion, 1% rise in pricing and 5% improvement in ancillary revenue per rental day. Adjusted EBITDA increased 9% to $81 million on account of higher revenue, partly offset by a 4% rise in per-unit fleet costs. International car rental revenues came in at $555 million, down 7% from the year-ago quarter, mainly impacted by negative currency movements. Results were also affected by 2% fall in rental days, offset by 1% rise in total revenue per rental day on a currency neutral basis. Adjusted EBITDA for the segment rose 17% to $56 million and improved 23% on a currency neutral basis, benefiting from higher fleet utilization in Europe and lower vehicle insurance expenses. Revenues for the Truck Rental business remained flat with last year at $85 million despite a 10% reduction in truck rental fleet in 2014. Also, the segment s adjusted EBITDA of $10 million doubled from the prior-year quarter. The increase in EBITDA was due to lower maintenance costs of its new fleet. Equity Research

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Fiscal 2014, in Brief Avis Budget s revenues for 2014 increased 7% to $8,485 million, primarily driven by a 7% rise in rental days, 2% growth in North American pricing and a 33% rise in ancillary revenues. However, revenues for the year fell short of the Zacks Consensus Estimate of $8,584 million. Driven by solid top-line growth along with improved margins, Avis Budget s adjusted earnings increased 35% year over year to $2.96 per share and beat the Zacks Consensus Estimate of $2.93. Other Financials Avis Budget ended the year with cash and cash equivalents of $624 million and total corporate debt of $3,420 million. As of Dec 31, 2014, the company s shareholders equity was $665 million. During 2014, the company generated $2,579 million in operating cash flow and about $456 million of free cash flow. In Nov 2014, the company acquired its Budget licensee for Southern California and Las Vegas, which functions directly at Los Angeles International Airport and through sub-licensees across Southern California and parts of Nevada. Share Repurchase During the fourth quarter, Avis Budget bought back nearly 1.7 million shares for $90 million, bringing the total share repurchases in 2014, to 5.7 million for about $300 million. Guidance Following a strong 2014, Avis Budget provided its outlook for 2015. The company expects revenue of roughly $8.8 billion, an increase of 4% from 2014. The company s North America segment rental days are now expected to grow 5% 7%, while pricing is anticipated to increase 2%, on a constant currency basis. Adjusted EBITDA is expected to be in the range of $900 million to $1 billion, representing a 3% 14% increase year over year. Adjusted EBITDA for the year is expected to include a $40 million negative impact from foreign exchange movements. Per-unit domestic fleet costs guidance for 2015 stands at about $320 $330 per month, marking an increase of 2% 5% year over year. Additionally, per unit fleet costs for the company are expected to be about $305 $315 per month, representing a 3% rise from 2014. Interest expense pertaining to corporate debt is expected to be nearly $200 million. The company s nonvehicle depreciation and amortization costs guidance (excluding the amortization of intangibles related to acquisitions) is at about $165 million. Consequently, the adjusted pre-tax income for 2015 is anticipated to be in the $535 $635 million range. The company s effective tax rate in 2015 is expected to be 37% 38% on an adjusted basis, while diluted shares outstanding are projected to be approximately 106 million. Based on the above expectations, the company s adjusted earnings are expected to be $3.15 $3.75 per share, reflecting a 6% 27% year-over-year increase.

Equity Research

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Avis to Operate Budget Brand in South Africa via Barloworld

Feb 9, 2015

Moving ahead with the expansion of its Budget Car Rental brand and further extending its multi-brand strategy, Avis Budget penned a deal with Barloworld Ltd. to operate its Budget Car Rental brand in southern Africa. Barloworld and Avis Budget have been partners for 45 years now. The former already operates the Avis brand in Angola, Malawi, Mozambique, Zimbabwe, Botswana, Lesotho, Namibia, South Africa, Swaziland and Zambia. Moreover, per the latest licensed deal, it will also operate its Budget brand in all these locations except Angola. Barloworld has time and again testified its capability by the success of the Avis brand in southern Africa. The brand has gathered significant honors and recognition, particularly for its impressive customer service in the region. Adding a new brand to Barloworld s portfolio, Avis expects the former to do justice by rendering the high quality service its Budget brand customers are used to. The aforementioned agreement, which was slated to take effect from Mar 1, is likely to benefit both the Avis and Budget brands as it will help them gain from Barloworld s enriched car rental market knowledge and experience.

Avis Fortifies Presence in Singapore with 12th Location

Jan 18, 2015

As a part of its ongoing global expansion strategy, Avis Car Rental, a unit of Avis Budget, opened its 12th rental station in Singapore at the Business Centre located at the lobby of Orchard Hotel. With this facility, the company expects to log additional bookings that will help in achieving persistent growth in Singapore along with meaningful profits. Through this new location, Avis Singapore expects to better serve the business and leisure travelers in the country with its high-quality and well-maintained fleet that includes vehicles from leading manufactures like Audi, Chevrolet, Hyundai, Mazda and Toyota. Additionally, travelers will have access to Avis automatic transmission vehicles and other amenities like Global Positioning System (GPS) navigation devices, child safety seats, vehicle damage coverage options and personal property protection packages. Avis already commands a prominent position in the Singapore market providing rental services in many key locations. The company serves three prime airports in the country including Changi Terminal 1, 2 and 3. It is also conveniently located in the island country s metropolitan areas such as Havelock Road, Marina Square Mall and Bukit Timah Road. Additionally, it operates five pick-up locations in Regus Centennial Tower, Marina Bay Financial Centre Tower 3, One Fullerton, Tampines Junction and JTC Summit in Jurong. Avis has a vast presence in Asia with over 300 locations, where it provides effective vehicle rental, vehicle leasing and limousine/premium chauffeur services through a network of wholly-owned subsidiaries, JVs and licensee agreements. Avis Budget had first stepped into the Asian continent in 1970, when it launched car rental operations in Hong Kong. Through the rest of the 1970s, the company steadily extended its operations in the continent with the launch of operations in Singapore, the Philippines, Malaysia, Indonesia and Pakistan.

Equity Research

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Since then, the company has largely expanded its footprint in the continent, expanding operations in various markets including India, Mainland China, Vietnam and Taiwan, with the latest additions being Laos and Cambodia.

Avis Budget Expands Fleet, Now Flaunts a Maserati Ghibli

Jan 6, 2015

Avis Budget added Maserati s Ghibli to its Avis Car Rental s fleet. Ghibli is available at only select locations, including Dallas, Las Vegas, Los Angeles, Phoenix, Orlando, San Francisco and South Florida. The 2015 Ghibli, Italian car maker s newest offering, is a sports sedan that has a 3.0-liter, twinturbocharged V6 engine designed to reduce fuel consumption and emissions. Moreover, it boasts of next-generation 8-speed ZF automatic transmission that is controlled by auto-adaptive software that facilitates accurate gear shifts. Further, double-wishbone front suspensions and the five-arm multilink system add to the car s performance. It is the first Maserati car that runs on a diesel engine. Avis Car Rental added Ghibli to its fleet in order to satisfy customers who want both style and excellent performance. Apart from Ghibli, the fleet s other luxury offerings include Lincoln Navigator, Infiniti QX60, Mercedes GL450, BMW X5, the BMW 3 Series Sedan, BMW 5 Series Sedan and Chevrolet Corvette.

Avis Budget to Acquire Scandinavian Licensees

Dec 17, 2014

Avis Budget inked a deal to acquire its licensee for the Avis and Budget brands in the three kingdoms of the Scandinavian region for approximately $50 million. The acquired licensees include Norway, Sweden and Denmark, operating both the Avis and Budget brands at prime places across the region including Oslo, Stockholm, Copenhagen and Sweden's Arlanda and Goteberg airports. The leading vehicle rental company in North America, Australia and New Zealand stated that the Scandinavian region provides greater opportunities for acquiring licensees and will contribute meaningfully to its strategic initiative of expanding geographic footprint. . Avis Budget expects the acquisition to generate positive synergies and be accretive to its annual revenue and adjusted EBITDA when fully acquired. The company estimates the acquisition to add over $100 million to annual revenues and about $10 million to adjusted EBITDA, including the royalties that the licensee was paying to the group. The deal is anticipated to close by the end of first-quarter 2015, after satisfying the customary closing requirements. Once acquired, the company plans to club the operations of these regions with that of the United Kingdom and make it functional under a newly formed Northern Unit within the EMEA region.

Equity Research

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VALUATION Currently, Avis Budget s trailing 12-month earnings multiple is 20.8x, compared with the 42.7x industry average and 18.5x for the S&P 500. Over the last 5 years, Avis Budget s shares have traded in the range of 5.7x to 63.0x trailing 12-month earnings. Our target price of $65.00, 18.3x 2015 EPS, reflects this view.

Key Indicators

P/E F1

P/E F2

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E (TTM)

P/E 5-Yr High (TTM)

Avis Budget Group, Inc. (CAR)

17.3

15.2

18.9

2.8

20.8

63.0

5.7

Industry Average S&P 500

N/A 16.8

43.1 15.7

15.4 10.7

16.9 14.9

42.7 18.5

N/A 18.4

35.6 12.0

32.6 42.5 19.4 32.6

9.6 9.8 14.1 19.3

Core-Mark Holding Co., Inc. (CORE) 28.0 21.1 17.0 21.1 29.8 Hertz Global Holdings, Inc. (HTZ) 20.9 15.9 13.0 2.9 14.2 Secom Co. Ltd. (SOMLY) N/A N/A N/A 2.8 19.5 Iron Mountain Inc. (IRM) 30.6 28.9 9.3 12.6 29.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/E 5-Yr Low (TTM)

P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

EV/EBITDA (TTM)

Avis Budget Group, Inc. (CAR)

9.7

10.7

1.8

47.1

17.3

0.0

5.5

Industry Average S&P 500

5.8 6.2

5.8 9.8

5.8 3.2

0.4 25.4

0.1 N/A

0.5 2.0

-3.2 N/A

Equity Research

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Earnings Surprise and Estimate Revision History

Equity Research

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DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CAR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform - 15.8%, Neutral - 78.2%, Underperform 5.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Equity Research

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