I think, you know, making Avis budget group Inc. (Code Nasdaq:car) tick? Of course, this is subject to the ebb and flow of the economy; the more money people have, the more they travel. There is a curious nuance of the car rental business, however, it may not even be fully appreciated long-term car owners in the warehouse.
That is, for companies to rent cars to remain profitable, they must have the opportunity to sell their old vehicles at prices high enough to significantly offset the cost of buying a new vehicle.
And the result is an auto sales surge, which now creates a record (and price-gouging) a glut of barely-used cars, that was easier said than done.
A tricky nuance for vehicles in stock
In most for the budget group avis like any other company. It has to compete (mostly with Hertz global holdings Inc. (US:HTZ) in this case), is operating expenses like salaries and advertising, non-cash expenses such as depreciation, and everything else.
Rent a car outfits a couple of extra lines on their income, however, that other companies do not have. Those “investment vehicles” and “proceeds from sale of vehicles.”
This is a great number too… big enough to make or break a car in the rental business.
In a normal situation, nothing special. As avis and Hertz have long mastered mathematics, and is also able to adjust as needed. We are not in a normal environment, though, at least when it comes to cars. Cox automotive believes that buyers will return to 3.9 million-lease cars this year after last year’s 3.6 million people.
In the past year from rental step-by-step ins were up 8.1% of the total by 2016. Meanwhile, Nada predicts more than 40 million used cars from hand to hand in 2018, after they reached last year a record high of 39.2 million units.
This had a negative impact on the price of a used car; if you put something in races of higher prices for those ‘anything’ pressured lower. Used cars are no exception to this dynamic.
The data J. D. Power confirms this trend. It used a price Index for cars, though rose 0.9% in March, dropped continuously since 2011. The dip really took hold in 2016.
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It was increasingly tough challenge for budget, Avis, and, consequently, for car promotion. The company said as much as from 2017 in the 2nd quarter report, CEO Larry de Shon said at the time, “our results in the second quarter in America reflect a 4% decrease in prices as a result of industry-fleeting and higher unit costs for transportation due to a decline in used-vehicle values.” However, there was a concern that first surfaced in last year’s report 1st quarter.
A picture says a thousand words
This is a trend that is a little difficult to see from one quarter to another. Hertz spends more money on cars in the first and second quarters of the year, but most business in the second and third quarter. He sells the majority of these funds in the fourth and first quarters of the year. There are some financial losers, but it had to happen — a loss of more than kompensiruet in other districts.
If you can smooth the edges of chaotic, although the statements of profit or loss of the company, You can see how slowly but surely cheaper the price of a used car (not to mention rising new car prices) dragged Avis budget below.
To smooth the non-synchronized auto sales, buying cars and trends in the field of income — the figure below plots the trailing twelve months tally for each go back a few years ago.
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To his credit, budget, Avis, at least, partly to counteract the decline in resale value of the car fleet by reducing the purchase of new. It seems that the negative impact on profit. Some careful number crunching, however, shows that even with such work, the cost of the purchase and sale of cars is on the rise again.
There, on the X-factor in this game, that just is not evident on charts or in books. That is, by means of a little more than the company could have had in the past can crimp consumer perception of the company. And the older and higher the mileage, the more maintenance it requires.
In other words, Avis budget can do long-term harm to the car stock in an effort to protect short-term results.
The trick is finding the optimal balance.
Looking forward for the car stock
Sliding prices for a used car does not appear to be a significant problem in the fourth quarter… at least not as it was in the middle of last year. One quarter does not make or break the trend. And a lot has changed in the automotive market over the past few months. And much can still change in the foreseeable future.
We just don’t know what the future looks that way. We just know that this particular rollback has the potential to increase the irritation into a full-scale financial problem for the company and for the owners of the fleet. Where it can be much worse than where it.
It’s just something to pay close attention to the numbers of Avis budget released Monday.
At the time of this writing, James Brumley does not occupy a position in any of the above securities. You can follow him on Twitter @jbrumley.