Small-Cap Value Investing

Buy This Company for 20 Cents on the Dollar
November 17, 2006

As an investor, it's time to protect your assets so they can grow well. Successful investing will require a combination of patience, realistic expectations; and most importantly, buying shares of businesses at the right prices. 

As investors, we're looking for a margin of safety...companies trading near or below their intrinsic value with an established earning power.

That's basically it. 

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You can use this same system to gain as much as 379%, 396%, and even 516% on every dollar you invest... As long as I hear from you by November 27. 

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Once such small-cap company that deserves your immediate attention is Avis Budget Group, (NYSE: CAR). It's a simple business model with a strong brand name. The company operates 6,600 car and truck rental locations generating 5.3 billion in sales. 

And right now this company is cheap.

Source: Morningstar

That's incredibly cheap for a company whose two brands enjoy a leading market share of the $18 billion airport car rental market...the place where the company earns about 80% of its sales.

So why is the company so cheap?

Well, for one, they're not a company subject to what Christopher Browne likes to call technological obsolesce...a Blockbuster video if you will.

Blockbuster Video may be cheap, but do you think people will continue to drive 15-30 minutes out of the way for a product that sits at the push of a button in their very own home?

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Your own personal winning "slot machine" is right at your fingertips and you may not even realize it...

Many in-the-know "jackpot" winners are already cashing in by predicting when they are going to hit their big payday -- and it's not by spending every waking hour in front of a slot machine in a smoky casino.

Read on to find out what TIME magazine refers to as "the slot machines of the equity market." 

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On the other hand, when's the last time you flew on an empty plane? When's the last time you tried to hail a cab on Monument Avenue in Richmond, Virginia?

Until you begin to see empty airports and yellow taxi's swarming the streets of America's mid-major cities with the energy and consistency of mid-town Manhattan, the demand for the rented 4-door sedan won't diminish anytime soon.

With an earnings yield of 16.4% on a company that produces steady operating margins and strong earnings, the risks of running in the red don't seem to justify the fact that you can buy the shares for 20 cents on the dollar.

Not a bad deal for a 2 billion dollar company that consistently churned out more than one billion in free cash flow 6 out of the last seven years.

Even after subtracting intangibles from the balance sheet, total assets still top total liabilities...cash and accounts receivable alone account for roughly 65% of the entire market cap.

The majority of the company's debt is used to finance its fleet. But most of those cars are bought with a prenegotiated repurchase program from its main suppliers, GM and Ford. So the assets are liquid.

Now financial strains at Detroit's auto kings has tricked down to price takers like Avis Budget. But what's to stop this company from eventually switching to another brand like Toyota or Hyundai? 

And it won't be long before the Chinese start producing more than just the items we see on Wal-Mart's shelves. They're aggressively moving up the value chain and entering the car market.

India presents a similar situation. Tata Motors, India's only domestic automaker, maintains that it will launch a $2,000 car within two years, according to Forbes.

With more supply coming on line, the bargaining power that Detroit now holds may not last. Meanwhile, Avis Budget enjoys a strong brand name; and more importantly, they possess somewhat of an economic moat at on-airport locations. This leads me to believe the company will provide steady to strong earnings in the years to come.
 
This analysis is just the start. We need to dig deeper. But twenty cents on the dollar looks pretty tempting for a company with a decent margin of safety.

Now I'm sure that tech stocks, swank hedge funds and their excessive fees, and other "insider" investments make a great story. It makes you feel good to proudly tell your neighbor that your broker just slipped you into some exclusive, private nanotechnology company that promises to turn the earth on its axis, reverse the spin, and solve the world's energy problems all at the same time.

Meanwhile, the value investor will keep a good portion of his money in a boring company that rents cars. He'll drip the $4.40 in annual dividends and watch his capital grow. And he'll make his investment like everyone should make investments...with a margin of safety.

Always remember rule number one: "Don't lose money."

Good Investing,
Christopher Hancock

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