Rental Car Industry Insights - research-and-analytics.csfb.com - Credit

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20 January 2016 Americas/United States Equity Research Business Services

Rental Car Industry Insights Research Analysts Anjaneya Singh, CFA 212 325 7306 [email protected] Zachary Bakal 212 325 7654 [email protected] Mark Wallach 212 325 2332 [email protected]

DECREASE TARGET PRICE

Pressure Pushing Down on Me, Pushing Down on You ■ Estimates: We reduce our estimates and target prices for the car rental companies, taking a more conservative view considering the macro uncertainty and rising rate environment. Our target for Hertz (HTZ) is now $17 (from $22) and our target for Avis Budget (CAR) is now $44 (from $54). ■ Still Positive, with a Caveat: Rental car stocks have lost ~50% of their value in the last 3 months, and down >30% just YTD (vs. S&P down 7%, and 8%, respectively). The extreme pressure seems to be more driven by macro-sentiment than actual deterioration in the industry-specific fundamentals. While the emergence of a recessionary environment could cause the stocks to trade lower still, we point to much cheaper valuation (~6x EBITDA and >15% FCF yield) as an attractive entry points for those constructive on the economy or with longer-term horizons. ■ Industry Fundamentals Look Healthy: 4% airline capacity growth and 46% RevPAR growth forecasts seem to indicate that 2016 should still be a year of healthy growth in the broader travel space. If the demand indicated by these forecasts materializes, we believe the environment in 2016 should be more conducive to pricing than it was in 2015, considering the much better operational abilities of the #2 player, HTZ. Used vehicle values normalizing this year should also provide upward pressure to pricing as the rental companies look to retain profitability. ■ Yet Much Needs to Go Right, Mainly Macro: For the rental car company stocks to work this year, stability is needed in many factors dependent on the macro environment. If travel trends were to soften, not only would it pressure volumes, but also pricing, due to lower fleet utilization. Fleet costs could also serve to be a drag on profitability if used vehicle values decline more than anticipated, something that seems more likely if the demand environment for vehicles softened. The pressure of rising rates also looms, potentially impacting interest expense and fleet costs. ■ Valuation Beginning to Trough: CAR and HTZ are trading at ~6x EBITDA, which is the lowest they have traded in the past ~3 years. On P/E, shares are trading at ~8x. The last time they traded near these multiples, the industry had not yet consolidated, and pricing had yet to be realized. Even in a bearish scenario that assumes lower volumes, negative pricing, as well as significantly higher interest expense and fleet costs, we show solid FCF yields of 10% for CAR and 7% for HTZ at current prices. We would expect both companies to aggressively utilize FCF towards share repurchases, providing support to shares at these levels.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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20 January 2016

Hertz Global Holdings Inc.

(HTZ)

Price (19 Jan 2016): US$9.19; Rating: OUTPERFORM; Target Price: (from US$22) US$17 Income Statement Revenue (US$ m) EBITDA Depr. & amort. EBIT (US$) Net interest exp Associates Other adj. PBT (US$) Income taxes Profit after tax Minorities Preferred dividends Associates & other Net profit (US$) Other NPAT adjustments Reported net income Cash Flow EBIT Net interest Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations CAPEX Free cashflow to the firm Aquisitions Divestments Other investment/(outflows) Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cashflow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at start Change in net debt Net debt at end Balance Sheet (US$) Assets Cash & cash equivalents Account receivables Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Liabilities Accounts payables Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholder equity Minority interests Total liabilities and equity Net debt

12/14A 11,046.0 1,331 (3,025) 1,008 (595) (9) 404 (60) 344 (89) 255 0 255 12/14A 1,008 (595) 60 2,979 3,452 (3,130) 322 (75) 93 (2,827) (3,183) 0 0 (100) 257 157 (31) 395 15,898 (395) 15,503 12/14A

12/15E 10,600.6 1,504 (2,811) 1,140 (561) 12 591 (74) 517 (145) 372 0 372 12/15E 1,140 (561) 78 2,870 3,527 (3,123) 404 (95) 81 (2,839) (3,164) (605) 0 (121) 238 (488) (21) (146) 15,503 146 15,649 12/15E

12/16E 10,704.4 1,715 (2,907) 1,380 (591) 0 789 (169) 621 (124) 497 0 497 12/16E 1,380 (591) 531 2,918 4,238 (3,675) 563 0 90 (3,296) (3,565) 0 0 (146) 146 0 0 673 15,649 (673) 14,976 12/16E

12/17E 11,134.3 1,903 (3,043) 1,565 (665) 0 900 (229) 671 (104) 567 0 567 12/17E 1,565 (665) 179 3,116 4,195 (3,478) 717 0 92 (3,088) (3,364) 0 0 (152) 152 0 0 831 14,976 (831) 14,145 12/17E

490 1,597 67 1,488 3,642 1,322 5,368 13,653 23,985

91 1,547 61 1,196 2,894 1,237 5,258 13,956 23,345

618 1,309 60 1,151 3,138 1,148 5,258 14,470 24,014

1,296 1,280 58 1,144 3,778 1,047 5,258 14,597 24,681

1,008 0 1,282 2,290 15,993 3,238 21,521 2,464 0 23,985 15,503

911 0 1,334 2,245 15,740 3,353 21,338 2,007 0 23,345 15,649

1,203 0 1,455 2,658 15,594 3,353 21,605 2,409 0 24,014 14,976

1,351 0 1,622 2,974 15,441 3,353 21,768 2,913 0 24,681 14,145

Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Dividend payout ratio Free cash flow per share Earnings Sales growth (%) EBIT growth (%) Net profit growth (%) EPS growth (%) EBITDA margin (%) EBIT margin (%) Pretax margin (%) Net margin (%) Valuation EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Price to book (x) Asset turnover Returns ROE stated-return on (%) ROIC (%) Interest burden (%) Tax rate (%) Financial leverage (%) Gearing Net debt/equity (%) Net Debt to EBITDA (x) Interest coverage ratio (X) Quarterly EPS 2014A 2015E 2016E

12/14A 454 0.56 0.00 0.00 0.71 12/14A 2.5 (41.8) (64.6) (63.9) 12.0 9.1 3.7 2.3 12/14A 1.77 15.2 19.4 16.4 1.6 0.5 12/14A 9.6 0.0 0.40 (272.7) 6.00 12/14A 629.2 11.6 1.7

12/15E 454 0.82 0.81 0.00 0.00 0.89 12/15E (4.0) 13.1 46.2 46.1 14.2 10.8 5.6 3.5 12/15E 1.86 13.4 17.3 11.2 1.6 0.5 12/15E 14.3 0.1 0.52 28.4 6.18 12/15E 779.8 10.4 2.0

12/16E 425 1.17 0.00 0.00 1.33 12/16E 1.0 21.1 33.6 42.8 16.0 12.9 7.4 4.6 12/16E 1.78 11.8 13.8 7.9 1.3 0.4 12/16E 18.1 0.1 0.57 37.0 5.29 12/16E 621.8 8.7 2.3

12/17E 425 1.33 1.44 0.00 0.00 1.69 12/17E 4.0 13.4 14.0 14.0 17.1 14.1 8.1 5.1 12/17E 1.64 10.6 11.6 6.9 1.1 0.5 12/17E 17.7 0.1 0.57 37.0 4.47 12/17E 485.6 7.4 2.4

Q1

Q2

Q3

Q4

0.03 0.00 0.11

0.29 0.24 0.30

0.44 0.49 0.62

-0.22 0.08 0.13

Share price performance 25 20 15 10 5 Apr- 1 5

H T Z .N

Ju l - 1 5

O ct - 1 5

Jan - 1 6

S& P 5 0 0 IN D EX

On 19-Jan-2016 the S&P 500 INDEX closed at 1881.33 Daily Jan20, 2015 - Jan19, 2016, 01/20/15 = US$21.52

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rental Car Industry Insights

2

20 January 2016

Avis Budget Group, Inc.

(CAR)

Price (19 Jan 2016): US$24.73; Rating: OUTPERFORM; Target Price: (from US$54) US$44 Income Statement Revenue (US$ m) EBITDA Depr. & amort. EBIT (US$) Net interest exp Associates Other adj. PBT (US$) Income taxes Profit after tax Minorities Preferred dividends Associates & other Net profit (US$) Other NPAT adjustments Reported net income Cash Flow EBIT Net interest Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations CAPEX Free cashflow to the firm Aquisitions Divestments Other investment/(outflows) Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cashflow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at start Change in net debt Net debt at end Balance Sheet (US$) Assets Cash & cash equivalents Account receivables Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Liabilities Accounts payables Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholder equity Minority interests Total liabilities and equity Net debt

12/14A 8,485.0 876 (147) 729 (209) 0 520 (194) 326 0 326 (81) 245 12/14A 729 (209) 280 1,779 2,579 (2,123) 456 21 (2,646) (2,807) (297) 0 524 (71) 156 (23) (95) 2,701 95 2,796 12/14A

12/15E 8,520.2 907 (165) 742 (200) 0 542 (211) 331 0 331 3 334 12/15E 742 (200) 130 1,869 2,541 (2,054) 487 8 (2,217) (2,385) (320) 0 157 (111) (274) (29) (147) 2,796 147 2,943 12/15E

12/16E 8,791.8 940 (170) 770 (190) (0) 580 (220) 359 0 359 0 359 12/16E 770 (190) 230 2,017 2,827 (2,296) 531 0 (1,570) (1,770) (200) 0 (526) 4 (721) 0 335 2,943 (335) 2,607 12/16E

12/17E 9,271.4 1,000 (175) 825 (191) 0 634 (241) 393 0 393 0 393 12/17E 825 (191) 230 2,160 3,024 (2,454) 570 0 (2,109) (2,309) (100) 0 (145) 0 (245) 0 470 2,607 (470) 2,137 12/17E

624 599 0 615 1,838 638 1,728 12,765 16,969

564 584 0 828 1,976 663 1,870 12,702 17,211

896 596 0 828 2,320 757 1,806 12,043 16,925

1,366 630 0 828 2,824 827 1,761 11,748 17,161

1,491 28 0 1,519 3,392 11,393 16,304 665 16,969 2,796

1,613 27 0 1,640 3,480 11,500 16,620 591 17,211 2,943

1,693 27 0 1,720 3,476 10,974 16,171 755 16,925 2,607

1,780 27 0 1,807 3,476 10,830 16,113 1,048 17,161 2,137

Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Dividend payout ratio Free cash flow per share Earnings Sales growth (%) EBIT growth (%) Net profit growth (%) EPS growth (%) EBITDA margin (%) EBIT margin (%) Pretax margin (%) Net margin (%) Valuation EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Price to book (x) Asset turnover Returns ROE stated-return on (%) ROIC (%) Interest burden (%) Tax rate (%) Financial leverage (%) Gearing Net debt/equity (%) Net Debt to EBITDA (x) Interest coverage ratio (X) Quarterly EPS 2014A 2015E 2016E

12/14A 111 2.96 0.00 0.00 4.12 12/14A 6.9 13.9 27.8 34.7 10.3 8.6 6.1 3.8 12/14A 0.62 6.2 7.2 8.4 0.5 0.5 12/14A 4.6 0.1 0.71 37.3 0.67 12/14A 420.5 3.2 3.5

12/15E 105 3.14 0.00 0.00 4.62 12/15E 0.4 1.8 1.6 6.3 10.7 8.7 6.4 3.9 12/15E 0.64 6.0 7.3 7.9 0.5 0.5 12/15E 6.5 0.1 0.73 38.9 0.68 12/15E 497.9 3.2 3.7

12/16E 102 3.52 3.57 0.00 0.00 5.21 12/16E 3.2 3.7 8.5 12.2 10.7 8.8 6.6 4.1 12/16E 0.58 5.8 6.6 7.0 0.5 0.5 12/16E 6.7 0.1 0.75 38.0 0.64 12/16E 345.4 2.8 4.1

12/17E 100 3.92 4.03 0.00 0.00 5.69 12/17E 5.5 7.2 9.3 11.3 10.8 8.9 6.8 4.2 12/17E 0.50 5.4 5.6 6.3 0.4 0.5 12/17E 6.9 0.2 0.77 38.0 0.59 12/17E 204.0 2.1 4.3

Q1

Q2

Q3

Q4

0.16 0.18 0.24

0.68 0.84 0.88

1.90 1.98 2.16

0.23 0.16 0.25

Share price performance 70 60 50 40 30 20 Apr- 1 5

C A R.O Q

Ju l - 1 5

O ct - 1 5

Jan - 1 6

S& P 5 0 0 IN D EX

On 19-Jan-2016 the S&P 500 INDEX closed at 1881.33 Daily Jan20, 2015 - Jan19, 2016, 01/20/15 = US$61.41

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rental Car Industry Insights

3

20 January 2016

Disproportionate Selloff The rental car stocks sold off significantly since 3Q earnings, and have continued their slide into 2016. What is peculiar about these moves is that CAR's 3Q update had minor downward revisions to the FY15 outlook (~1%), while HTZ held an analyst day providing a FY16 (and beyond) outlook that was better than anticipated. Since then, there has been little in the way of fundamental updates from the companies, yet the stocks continue to trade poorly. Our conversations with investors suggest that the recent weakness may have more to do with macro-related fears than an outlook on industry specifics that has gone sour (pricing, competitor behavior, etc.).

Figure 1: Car Rental Has Underperformed Broader Index and Travel Stocks Since the Beginning of 2015… 140 120

HTZ

100

CAR

80 60 40 20 0

MAR HLT UAL AAL DAL SPX DJT

Source: Thomson Reuters

Figure 2: …With an Even Sharper Divergence YTD 105 100

HTZ

95

CAR

90 85 80 75

MAR HLT UAL

70

AAL

65

DAL

60

SPX DJT

Source: Thomson Reuters

Rental Car Industry Insights

4

20 January 2016

The Demand Outlook To be fair, if 2016 does shape up to be a year of slow or negative growth, the rental car companies can get hit on multiple fronts: weaker volume, weaker pricing, and higher fleet costs. Yet in the absence of a recessionary environment, when looking at the industryspecific fundamentals – it seems like such an outlook may be a bit too dire. We get some comfort around the outlook when looking at the CS Economic Team's view, and the fact that the airline industry is still planning capacity expansions (see Figure 3), and the hotel industry is still forecasting RevPAR growth (see Figure 4). We look to airline capacity (available seat miles) forecasts to show that the outlook for broader travel remains healthy, with the Credit Suisse Airlines team forecasting 4% ASM growth in 2016 and 2017.

Figure 3: Available Seat Miles Have Been Strong and Forecasts Are Positive 8% 6% 4% 2% 0% -2% -4% -6%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

-8%

Available Seat Miles Y/Y Growth Source: US DOT, Credit Suisse estimates

We look at RevPAR forecasts to indicate that the leisure industry remains healthy. RevPAR forecasts are still in the mid-single-digit range for 2016, with STR forecasting 5.7% RevPAR growth for 2016, supported by both Hilton's and Marriot's 4-6% forecasts. We also note that the bit of softness seen in 3Q15 was likely attributable to the calendar timing of holidays, as well as other seasonal factors.

Rental Car Industry Insights

5

20 January 2016

Figure 4: RevPAR Growth Has Held Up Nicely, Expected to Grow MSDs in 2016 15% 10% 5% 0% -5%

TTM Average +6.8% Y/Y

-10% -15% -20%

Jul '15

Jan '15

Jul '14

Jan '14

Jul '13

Jan '13

Jul '12

Jan '12

Jul '11

Jan '11

Jul '10

Jan '10

Jul '09

Jan '09

-25%

Source: STR, Company Data, Credit Suisse

From an industry specific perspective, fleets are running tighter than they have in years prior, the #2 player, HTZ, has significantly fixed its issues, pricing has easier comps, and used vehicle values remain stable. We believe that much of the what had derailed the pricing thesis from playing out in 2015 has largely resolved itself, and if the macro holds up, the rental car stocks should work.

Fleet Cost Fears The recent selloff in autos also seems to be reverberating through the rental car stocks, with the primary concerns around the December SAAR number, and commentary from dealers on the industry moving to more of an "OEM push" environment than a "consumer pull." The CS autos team dissects these factors in a recent note, discounting a precipitous decline in SAAR given strong jobs growth and low fuel prices. Their forecast is for SAAR to decline to 17mm in 2017, and to be only modestly positive in 2016 (at 17.4mm from 17.3mm in 2015), which would imply a decline from the 18mm+ numbers that we saw over the past few months.

Figure 5: SAAR Seems to Have Peaked

US SAAR

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

20 19 18 17 16 15 14 13 12 11 10

6 month trailing avg SAAR

Source: Company data, Credit Suisse Research

Rental Car Industry Insights

6

20 January 2016

Used vehicle values were much more resilient than anticipated in 2015, and we believe the risk of a precipitous decline in used vehicle values is low considering the unemployment situation and low fuel prices. Ally Financial is forecasting a 5% decrease over 2016 and a 10% decrease over the next two years in used car values. We note that a softening used vehicle pricing environment is generally supportive for RPD increases as the rental car companies look to retain their profitability.

Figure 6: Manheim Used Vehicle Value Index 160 150 140 130 120 110 100 90 80

Manheim Used Vehicle Value Index

Rental Risk Index

Source: Manheim Consulting, Credit Suisse Research

Interest Rate Sensitivities The risk of rising interest rates is also something we’re hearing much more concern from investors on, with the recent Fed announcements. The Credit Suisse house view calls for three 25bp rate hikes in 2016 (See Credit Suisse Core Views). We are not economists and plan on sticking to forecasting car rental rates. Still, we have decided to incorporate the Credit Suisse view on rates into our forecasts for both companies. While we do not consider the companies heavily levered from the perspective of balance sheet or liquidity risk, given that fleet assets essentially securitize all fleet debt, a large portion of the industry fleet debt is floating rate, and changes in interest rates do have a material impact to both earnings and EBITDA. The latter seems less well-understood by investors, and sometimes requires some explaining1. In Figure 7, we estimate the sensitivity of our 2016 estimates to changes in interest rates across all floating rate debt across the yield curve. The sensitivities vary for both companies, due to some differences in financing amounts and structures, but mostly due to the fact that CAR has disclosed some hedges. We estimate that a 1% increase in interest rates would have a 3-5% impact on EBITDA.

1

Rental Car Industry Insights

Both EV and EBITDA are adjusted in the car rental space in order to exclude fleet ABS holders as stakeholders from the capital structure. ABS owners are not really stakeholders in the business so much as stakeholders in the value of the fleet that the rental companies happen to own, and their claim on the assets of the company is offset by the residual value of the assets purchased with the proceeds from their issuance. As a result, when it comes to EV, fleet debt is not added to equity value. If fleet debt were to be considered, you would have to consider the value of the cars owned (or at least their residual value) as an asset offsetting the value of the fleet debt, which would introduce unnecessary complexity and would not really help value the business. However, if you are not treating ABS holders as stakeholders, it would be overly optimistic to add back the interest they receive to earnings. That expense takes away from the cash available to the true stakeholders. As a result, Corporate EBITDA does not exclude vehicle interest expense, and higher interest rates on floating rate fleet debt negatively impact EBITDA.

7

20 January 2016

Figure 7: HTZ and CAR Interest Sensitivity Note: Based on the change in annual interest expense if rates changed across the curve.

2016E Average Corporate Debt % of Corporate Debt Floating

HTZ 6,245 38%

CAR 3,504 12%

Average Fleet Debt % of Fleet Debt Floating

10,071 72%

9,066 35%

Total Debt Total Debt / 2016 EBITDA % of Debt Floating

16,316 9.5x 59%

12,569 13.4x 28%

Change in Interest Rates 0.25% 0.50% 0.75% 1.00%

Change in Adj. EBITDA (1.1%) (0.8%) (2.1%) (1.7%) (3.2%) (2.5%) (4.2%) (3.3%)

Change in Interest Rates 0.25% 0.50% 0.75% 1.00%

Change in Adj. EPS (3.0%) (1.5%) (6.1%) (3.1%) (9.1%) (4.6%) (12.2%) (6.1%)

Source: Company data, Credit Suisse estimates

Aside from the direct rate sensitivity via their floating rate debt, both companies are arguably exposed via their risk fleets. Historically, auto loan rates are correlated with the Manheim index, which we view as the best proxy for used vehicle values (see Figure 8). However, we see it as unlikely that a small change in short-term interest rates will have a significant impact on used vehicle values, as the change in rates should have a negligible impact on monthly interest expenses for consumer vehicle buyers.

Figure 8: New Auto Loan Rates and the Manheim Index 130 125 120 115 110 105 100 95 90

0% 2% 4% 6% 8% 10%

1Q97 4Q97 3Q98 2Q99 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15

12%

New Auto Loan Rate (inverted, R)

Manheim Index (L)

Source: Federal Reserve, Manheim Consulting, Credit Suisse research

Rental Car Industry Insights

8

20 January 2016

Pricing Should Work Better if Macro Holds Up The debate on pricing has not changed much, and remains a big focus of investors. Due to seasonality in leisure demand, we worry that meaningful improvement in the realized pricing metric may not show up until the 2Q16 is reported (heavier leisure travel in the warmer months improves utilization and allows for pricing). This delay in pricing could stymie near-term improvements in the share prices for these stocks, with many investors awaiting this materialization to regain conviction in the industry's bull thesis. That having been said, we note that our checks indicate that competitors have been behaving more rationally with regards to pricing than some investors had expected, with the most notable point being that Enterprise has not been overly aggressive on keeping prices low. In fact, over the past three months, Enterprise brands have been in the leading positions in pricing quotes in their respective tiers a number of times, while often taking a comfortable #2 seat, particularly in the premium tier.

Figure 9: Airport Price Quotes by Major Brand $90 $80 $70 $60 $50 $40 $30 Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov '13 '13 '13 '14 '14 '14 '14 '14 '14 '15 '15 '15 '15 '15 '15 Avis

Hertz

National

Budget

Enterprise

Alamo

Thrifty

Dollar

Source: Rate Highway, Credit Suisse Research

Rental Car Industry Insights

9

20 January 2016

Valuation Looks Attractive Figure 10: CAR and HTZ Forward EV / EBITDA Multiple History 11x 10x 9x 8x 7x 6x 5x 4x 3x

Industry

2x

HTZ

1x

CAR

Jan '07 Apr '07 Jul '07 Oct '07 Jan '08 Apr '08 Jul '08 Oct '08 Jan '09 Apr '09 Jul '09 Oct '09 Jan '10 Apr '10 Jul '10 Oct '10 Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15

0x

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

Meanwhile, valuations have come down significantly over the past six months, but as we look at valuations over the last down cycle, it seems that there could be more downside if the broader macro economy and/or travel weakens. Trough valuation in the space historically has been ~3-4x EBITDA in periods of significant economic distress. However, the industry is significantly healthier today than it was pre-crisis with the outlook for revenue and margins much more stable, even among more bearish investors. Moreover, some of the crisis impact was the result of financial factors that are unlikely to recur, such as the lock-up in the ABS markets the companies use to finance fleet purchases. Looking at either HTZ or CAR, we see that forward expectations for sales growth and EBITDA margins are far from trough levels (see Figures 12-15). Unless there is further deterioration in the travel environment or in the macroeconomic outlook, we believe further multiple compression from here is not justified, and view the current valuations to be an overdone sell-off, in light of economic and industry forecasts discussed prior. We think this is illustrated by the multiple discount to the major indices, which is the greatest since the end of 2012, when Hertz acquired Dollar Thrifty, and on par with periods in 2009.

Figure 11: Industry Forward EV / EBITDA Discounts to Major Indices 6x EV / EBITDA Discount vs. R1000 5x EV / EBITDA Discount vs. S&P 500 4x 3x 2x 1x

Sep '15

Apr '15

Nov '14

Jun '14

Jan '14

Aug '13

Mar '13

Oct '12

May '12

Dec '11

Jul '11

Feb '11

Sep '10

Apr '10

Nov '09

Jun '09

Jan '09

Aug '08

Mar '08

Oct '07

May '07

Dec '06

0x

Source: the BLOOMBERG PROFESSIONAL™ service, Clarifi, Company Data

Rental Car Industry Insights

10

20 January 2016

Figure 12: HTZ NTM EV / EBITDA and Margins 10x

Figure 13: CAR NTM EV / EBITDA and Margins 25%

9x 8x

20%

12x

12%

10x

10%

8x

8%

6x

6%

4x

4%

7x 6x

15%

5x 4x

10%

3x 2x

HTZ NTM EV / EBITDA (L)

1x

HTZ NTM EBITDA Margin (R)

0x

5%

CAR NTM EV / EBITDA (L)

2x

2%

CAR NTM EBITDA Margin (R) 0%

0x

'07 '08 '09 '10 '11 '12 '13 '14 '15

0% '07 '08 '09 '10 '11 '12 '13 '14 '15

the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates

the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates

Figure 14: HTZ NTM EV / EBITDA and Growth

Figure 15: CAR NTM EV / EBITDA and Growth

10x 9x 8x 7x 6x 5x 4x 3x 2x

HTZ NTM EV / EBITDA (L)

1x

HTZ NTM Organic Growth (R)

0x

15%

12x

15%

10%

10x

10%

5%

8x

5%

0%

6x

0%

-5%

4x

-5%

-10%

2x

-15%

0x

'07 '08 '09 '10 '11 '12 '13 '14 '15 the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates

CAR NTM EV / EBITDA (L)

-10%

CAR NTM Organic Growth (R) -15% '07 '08 '09 '10 '11 '12 '13 '14 '15 the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates

Figures 12-15 show that sell-side estimates, at least, are not as harsh as the current multiples might indicate. While estimates may still indicate some optimism at this point, given that we find ourselves on the low end, today's valuation off a conservative base still looks punitive to us. Off our new estimates, HTZ and CAR are trading at ~5.6x and ~5.8x 2016 EBITDA respectively, and with FCF yields of 14% and 21%. A bear could argue that our estimates are still too high, and so we decided to run stress scenarios on our estimates for HTZ and CAR. We summarize these tests in Figure 16 and Figure 17. Despite declining revenues and significant margin compression from rising fleet and interest costs, as well as operational deleveraging, we still find that shares today would provide a solid FCF yield of 10% and 7% for CAR and HTZ respectively. Even someone with a significantly more negative outlook on our base case should appreciate the free cash flow, which we believe would be put to good use repurchasing shares if the current pressure continues. In our view, shares today are already pricing in significantly worse performance than we are modelling (our base case, below), and we feel we are appropriately conservative given the economic outlook today. Rental Car Industry Insights

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Figure 16: Scenario Analysis for HTZ HTZ Scenario Analysis Bear Base US volume growth -2.0% 1.6% US pricing growth -1.0% 0.4% US depr/unit growth 10.0% 7.4% Int'l volume growth 0.0% 2.3% Int'l pricing growth -7.5% -5.2% Int'l depr/unit growth 0.0% -8.8% Fleet interest rate 4.0% 3.0%

Bull 4.0% 2.0% 5.0% 5.0% -2.5% -10.0% 3.5%

Total EBITDA

1,497

1,715

1,897

Incremental FCF Total FCF Delta

-292 271 -52%

563

145 708 26%

Share price FCF yield

$9.19 6.9%

$9.19 14.4%

$9.19 18.1%

Source: Company data, Credit Suisse estimates

Figure 17: Scenario Analysis for CAR CAR Scenario Analysis Bear Base US volume growth 1.0% 3.9% US pricing growth -1.0% 0.5% US depr/unit growth 7.5% 5.0% Int'l volume growth 2.0% 4.9% Int'l pricing growth -4.0% -1.8% Int'l depr/unit growth 5.0% 2.1% Fleet interest rate 5.0% 3.7% Total EBITDA

710

940

1,131

-271 260 -51%

531

182 713 34%

$24.73 10.3%

$24.73 21.1%

$24.73 28.3%

Incremental FCF Total FCF Delta Share price FCF yield

Bull 5.0% 2.0% 2.5% 8.0% 0.0% 0.0% 4.0%

Source: Company data, Credit Suisse estimates

While we chiefly look to EV / EBITDA and FCF in valuing rental car companies, some investors do prefer P/E. On a forward P/E basis, the stocks are below a standard deviation of their normalized average (we exclude ratios above 25x, see Figures 18 and 19). HTZ and CAR are trading at ~7.9x and ~7.0x our 2016 EPS.

Figure 18: HTZ NTM P/E, with Average and St. Dev.

Figure 19: CAR NTM P/E, with Average and St. Dev.

25x

25x

20x

20x

15x

15x

10x

10x

5x

HTZ NTM P/E

5x CAR NTM P/E 0x

0x '07

'08

'09

'10

'11

'12

'13

'14

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Rental Car Industry Insights

'15

'07

'08

'09

'10

'11

'12

'13

'14

'15

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

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20 January 2016

Companies Mentioned (Price as of 19-Jan-2016)

American Airlines Group Inc. (AAL.OQ, $38.86) Avis Budget Group, Inc. (CAR.OQ, $24.73, OUTPERFORM, TP $44.0) Delta Air Lines, Inc. (DAL.N, $45.96) Hertz Global Holdings Inc. (HTZ.N, $9.19, OUTPERFORM, TP $17.0) Hilton Worldwide Holdings (HLT.N, $17.31) Marriott International (MAR.OQ, $58.38) United Continental Holdings, Inc. (UAL.N, $45.18)

Disclosure Appendix Important Global Disclosures

I, Anjaneya Singh, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Avis Budget Group, Inc. (CAR.OQ) CAR.OQ Date 04-Dec-14 19-Feb-15 05-May-15 25-Jun-15 04-Aug-15 03-Nov-15

Closing Price (US$) 61.16 64.83 53.71 45.84 45.08 46.35

Target Price (US$) 72.00 76.00 65.00 62.00 55.00 54.00

Target Price

Rating O*

Closing Price CAR.OQ

80

60

40

* Asterisk signifies initiation or assumption of coverage.

20 1- Jan- 15

1- Apr- 15

1- Jul- 15

1- Oct- 15

1- Jan- 16

O U T PERFO RM

3-Year Price and Rating History for Hertz Global Holdings Inc. (HTZ.N) HTZ.N Date 10-Feb-14 08-Sep-14 20-Jul-15 09-Nov-15 17-Nov-15

Closing Price (US$) 25.95 28.50 18.02 16.44 16.31

Target Price (US$) 29.00 23.00 21.00 22.00

Target Price

Rating N* NR O

Closing Price HTZ.N

35

25

15

* Asterisk signifies initiation or assumption of coverage. 5 1- May- 14

1- Sep- 14

1- Jan- 15

1- May- 15

1- Sep- 15

1- Jan- 16

N EU T RA L N O T RA T ED O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

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20 January 2016

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Of which banking clients (%)

Outperform/Buy* 56% (34% banking clients) Neutral/Hold* 31% (26% banking clients) Underperform/Sell* 12% (42% banking clients) Restricted 1% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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There are several risks to our $44 target price and Outperform rating, including lower airline travel, housing weakness, and seasonality. The car rental business is a highly competitive and cyclical business and CAR may not be able to compete successfully in the future. A decline in used car prices, OEM recall activity can significantly impact CAR's business. CAR has significant indebtedness and also faces risks related to former subsidiary liabilities.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Hertz Global Holdings Inc. (HTZ.N) Method: Our target price of $17 is based on a sum of the parts analysis, where we assign values to the equipment rental business (HERC), the share repurchase authorization, Hertz's stake in China Auto Rental Inc., and the Donlen leasing business. We also assume a normalized EBITDA for the Rental Car (RAC) business of approximately $1bn at an 8x multiple discounted back. Given the significant upside available to our price target, we rate the stock Outperform. Risk:

Risks to our $17 price target and Outperform rating include: 1) with a new and relatively untenured management team, Hertz's performance is dependent upon the abilities of the management as they develop in their roles, 2) Hertz's businesses are highly cyclical. Any macroeconomic shocks could significantly impact profitability, 3) Fleet costs are expected to rise in the rental car industry as the supply of used vehicle values increases. This may cause Hertz's fleet costs to rise, 4) the rental car business can be competitive. Failure to compete effectively could lead to a loss of market share or reductions in price across the industry, 5) if significant automobile recalls occur, Hertz might be unable to meet demand with capacity, leading to lost revenue opportunities, and 6) Hertz is currently subject to a number of claims, investigations, and proceedings relating to misstatements in their prior financial filings.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names

The subject company (HTZ.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (HTZ.N) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (HTZ.N, CAR.OQ). Rental Car Industry Insights

14

20 January 2016

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