Analysts: Brighter Days On The Horizon For Budget

<B> Analysts: Brighter Days On The Horizon For Budget</B>

By Lynn Woods

Despite the dismal performance of Budget Group's stock--trading at 6-15/16 at the end of October--and difficulty meeting its earnings numbers, analysts said the car rental industry's number-four player was turning the corner. "The company's headed in the right direction," said Dean Gianoukos, equity car rental analyst at J.P.Morgan. "It's in the process of a turnaround." But the challenge ahead--building back credibility with Wall Street--will not be an easy one, noted Neil Abrams, president of Abrams Consulting Group, a car rental consultancy based in Purchase, N.Y.

In the last two quarters, Budget cut its earnings estimates in half. The firm reported third-quarter net income of $37.3 million, a significant decrease from the $61 million reported in the third quarter of 1998.

Abrams said the company was widely perceived as attempting to do too much in too little time. Since former franchisor Sandy Miller took the helm in 1997, the company has acquired a slew of companies, including Cruise America, a recreational vehicle rental firm, and Ryder Truck Rental. "They were distracted from their core business of car and truck rentals," Abrams said. A particular problem has been Budget's used-car sales business, which has been a drain, he added.

However, Miller has a plan, and it seems to be resonating with analysts, who said the company is regaining its focus. In a shift from his original strategy of building a diverse company of synergistic businesses, Miller now is concentrating on consolidating Ryder Truck Rental and Premier, Budget's local replacement company, into the car and truck rental business, which he said would help trim costs by $63 million by the end of the year.

"We've been a consolidator," he said. "More multiple locations could be consolidated, lowering our fleet costs, and there will be more savings through new technology. We're still a work in progress."

Meanwhile, the company is in discussion with possible buyers of Cruise America, which has annual revenues of about $100 million, and its $40 million Van Pool Services Inc.

"If we had acquired Ryder before we'd had those two companies, we wouldn't have needed to buy them," Miller said, explaining that these ancillary businesses were purchased to help reduce the company's exposure to the economic vagaries of the car rental industry, which is susceptible to the slightest increase or decrease in pricing or interest rates because it is so highly leveraged.

One challenge with Cruise America, Miller added, is that "it's a third-quarter company," with the bulk of rentals occurring between June and September. "You take losses in the first and second quarter and bet the farm on the third quarter. It's tough when you're running a public company. You need it to be great all the time."

Miller blamed some of the difficulties Budget has experienced with its stock on Wall Street's myopic view of car rental in general. "As an industry we struggle with our price earnings multiple," he said. "Avis is trading 5.5 times its earnings. Hertz is trading 10 to 12. If this were another industry, they'd be trading at 25 percent earnings. Wall Street says, 'if a car rental company can't find a way to raise rates to increase yields, we'll discount your price earnings.' "

And the pressure on the Street is getting worse: "Five years ago, if you were off, your stock was off two to three percent," said Miller. "But now your stock is 50 percent off if you miss earnings by three cents." A more constructive course would be for stock analysts to "focus on the growth in volume and dramatic rate increases of the last few years," he said.

Analysts have said that Budget may have gotten in over its head with the purchase of Ryder, the nation's second-largest truck rental firm (after U-Haul). Miller said the company hadn't been able to raise the rates of its truck rentals to the level it wanted because of a failed delivery of trucks. Despite the snag, Miller remained committed to the Ryder acquisition and said integrating Ryder into Budget Truck Rental is a critical component of the company's growth.

"Truck rental is a $3 billion industry," he said. "We've got the number two and three [Budget Truck Rental] companies. We're integrating the back office and will merge the brands, going from 600 Budget locations to 3,500 Budget Ryder locations." Cobranding will begin mid next year and continue for the following six years, at which time the Ryder name will disappear.

Another area of growth is the local replacement market, Miller said.

While Budget's local replacement firm, Premier, has languished--so far, none of the majors' modest attempts to go after this market have made a dent in Enterprise Rent-A-Car's formidable dominance--management has drafted a new plan: Taking advantage of Budget's "fairly good penetration of downtown markets," the Premier locations will be merged with the Budget brand and local replacement rentals will be conducted out of the same locations used for retail rentals.

The concept of a joint retail-insurance replacement location is being tested in Denver, where Budget is monitoring the reactions of customers and insurance companies. If the three-month pilot is successful, Budget will move ahead on the merger by mid 2000, phasing out the Premier name.

Miller said the main impetus for the merger was the fact that insurance companies want to work with a national, rather than regional, brand--an advantage of Enterprise. "At Enterprise, insurance companies can make one call for 2,000 locations," he said. "With 650 locations, we also have a national brand." The merger of Premier's 200 locations and 40,000 vehicles into Budget's network also will help reduce redundant overhead, he said.


<B>Motor Franchise</B>

Meanwhile, Budget is switching to a franchise system for its used-car sales division, which had revenues of $151.6 million in the third quarter, down $20 million from the previous year, in part reflecting the sale of eight stores. The company has agreements in place for 22 franchised locations, and it plans to maintain all locations on a franchised basis--including the nine stores that currently are corporate-owned--by the end of the year. Franchising will enable Budget to collect royalty fees without having to assume the risks associated with the volatile used-car business, said Miller.

The third major area of growth is Europe. Budget's business on the Continent seriously had been hurt in the last few years by the diverting of rentals by Sixt, its former licensee, to Sixt locations, rather than Budget's, as stipulated in the contract. Having successfully completed long and expensive litigation against Sixt--Budget won its suit (<I>BTN</I>, July 19)--Budget now is back in business in the Rhineland.

In the past month, it has opened 12 corporate-owned locations at the country's major airports, 11 of them in-terminal, and will follow with Munich by the end of the year. It also plans to open 36 franchised nonairport locations by Dec. 31. "We just got control of the best car rental locations in the world," Miller said. By the end of 2000, Budget expects to be operating 180 locations in Germany, representing a mix of corporate-owned and franchised locations.

Germany is a key market in Europe because of the enormous number of Germans who book cars there for outbound rentals, Miller said. (At Cruise America, 55 percent of the business in the United States and Canada consists of Germans). "It's important to control that outbound business," plus, "certain airport markets, such as Munich, Berlin and Frankfurt, do a huge volume of business."

With corporate-owned locations in Austria, Finland, France, Germany, Holland, Norway, Spain, Switzerland and the United Kingdom (it plans to purchase a number of locations in Italy as well), Budget can offer its corporate accounts "one-stop shopping." Miller said the company's ability to offer corporate rates around the world (it also owns locations in Australia and New Zealand) enabled it to bid on several global accounts recently. And with the introduction of Fast Break, its express rental service, and Perfect Drive, its customer loyalty program, across the pond next year, Budget hopes to raise service standards on the Continent to those of the United States.

However, analysts said the most welcome development at Budget was the recently announced appointment of David N. Siegel, former president of Continental Express, as the company's president and chief operating officer (<I>BTN</I>, Nov. 1). Siegel is expected to bring some badly needed operations expertise to Budget.

''Sandy is running around making deals, and operations is not one of his strengths," said one analyst. "Running massive amounts of vehicle rentals is very complex. Budget hasn't had a lot of operations leadership, and many of the people Sandy's brought in haven't stayed long."

With his success in enhancing profits at Continental Express--one of his tasks was developing the strategy for conversion of the fleet from props to all jets--Siegel seems to have what Abrams called the "type of profile that fits in with Budget's needs.