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CAR / Avis


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Hi

Bruce Berkowitz of Fairholme mentioned in last OID about his investments in car rental biz - Avis.

Can anyone following Avis (CAR) tell hows did the company did in past few months - the stock move up from as low as 0.5 to 10!

 

Value

-India

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Hi

Bruce Berkowitz of Fairholme mentioned in last OID about his investments in car rental biz - Avis.

Can anyone following Avis (CAR) tell hows did the company did in past few months - the stock move up from as low as 0.5 to 10!

 

Value

-India

 

Berkowitz was talking about Hertz, not Avis.

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People started renting cars again.

 

The company's low share price and bond yields reflected a fear of insolvency, given large debt maturities. The plan was for the company to shrink its fleet to increase free cash flow, to put a dent in near term debt maturities. and to increase utilization rates. Alas, people started renting cars again, as the economy has not gone to hell, and the company has been buying cars at discounts like crazy to meet this unexpected upturn in rental demand. Basically, a much quicker than expected upturn in demand.

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People started renting cars again.

 

The company's low share price and bond yields reflected a fear of insolvency, given large debt maturities. The plan was for the company to shrink its fleet to increase free cash flow, to put a dent in near term debt maturities. and to increase utilization rates. Alas, people started renting cars again, as the economy has not gone to hell, and the company has been buying cars at discounts like crazy to meet this unexpected upturn in rental demand. Basically, a much quicker than expected upturn in demand.

 

Here's the quote from the latest Fairholme letter:

 

 

For sure, it will take a long time to repair the damaged balance sheets of

individuals, corporations and entire nations. Still, we are hopeful that the global

economy is on the mend. One of our canaries in the economic coal mine is Hertz

Global Holdings. In a June 25 interview on CNBC, Hertz CEO Mark Frissora said

“we’ve seen continuous improvement every single week for the last 10 weeks in the

US rent-a-car space on improving demand for the summer season. We’ve been

buying a lot of cars the last eight weeks…. We’re scrambling to buy as many cars

as we can.” Others are beginning to chirp, but are less sanguine.

 

 

You can find the whole letter here:

 

http://www.fairholmefunds.com/2009semi.pdf

 

 

 

 

 

 

 

 

 

 

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The reason the company went up so much is the leverage in these types of business.  Berkowitz's other holding in the rent space is URI.  He has an interesting thesis of large free cash flows being generated from de-fleeting (reduction in fleet size to match demand) and being used to reduce debt.  I think most of his investment is in the debt of these firms as they were yielding high returns.  The common stock of these firms is like a call option on the value of the equipment they lease out.  If you go to the Fairholme site, you can get an OID excerpt which describes his thesis in detail.

 

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