decrease target price

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.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

20 January 2016Americas/United States

Equity ResearchBusiness Services

Rental Car Industry Insights DECREASE TARGET PRICEResearch Analysts

Anjaneya Singh, CFA212 325 7306

[email protected]

Zachary Bakal212 325 7654

[email protected]

Mark Wallach212 325 2332

[email protected]

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 4-6% 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.

20 January 2016

Rental Car Industry Insights 2

Hertz Global Holdings Inc. (HTZ)Price (19 Jan 2016): US$9.19; Rating: OUTPERFORM; Target Price: (from US$22) US$17Income Statement 12/14A 12/15E 12/16E 12/17ERevenue (US$ m) 11,046.0 10,600.6 10,704.4 11,134.3EBITDA 1,331 1,504 1,715 1,903Depr. & amort. (3,025) (2,811) (2,907) (3,043)EBIT (US$) 1,008 1,140 1,380 1,565Net interest exp (595) (561) (591) (665)Associates - - - -Other adj. (9) 12 0 0PBT (US$) 404 591 789 900Income taxes (60) (74) (169) (229)Profit after tax 344 517 621 671Minorities - - - -Preferred dividends - - - -Associates & other (89) (145) (124) (104)Net profit (US$) 255 372 497 567Other NPAT adjustments 0 0 0 0Reported net income 255 372 497 567Cash Flow 12/14A 12/15E 12/16E 12/17EEBIT 1,008 1,140 1,380 1,565Net interest (595) (561) (591) (665)Cash taxes paid - - - -Change in working capital 60 78 531 179Other cash & non-cash items 2,979 2,870 2,918 3,116Cash flow from operations 3,452 3,527 4,238 4,195CAPEX (3,130) (3,123) (3,675) (3,478)Free cashflow to the firm 322 404 563 717Aquisitions (75) (95) 0 0Divestments 93 81 90 92Other investment/(outflows) (2,827) (2,839) (3,296) (3,088)Cash flow from investments (3,183) (3,164) (3,565) (3,364)Net share issue(/repurchase) 0 (605) 0 0Dividends paid 0 0 0 0Issuance (retirement) of debt (100) (121) (146) (152)Other 257 238 146 152Cashflow from financing activities 157 (488) 0 0Effect of exchange rates (31) (21) 0 0Changes in Net Cash/Debt 395 (146) 673 831Net debt at start 15,898 15,503 15,649 14,976Change in net debt (395) 146 (673) (831)Net debt at end 15,503 15,649 14,976 14,145Balance Sheet (US$) 12/14A 12/15E 12/16E 12/17EAssetsCash & cash equivalents 490 91 618 1,296Account receivables 1,597 1,547 1,309 1,280Inventory 67 61 60 58Other current assets 1,488 1,196 1,151 1,144Total current assets 3,642 2,894 3,138 3,778Total fixed assets 1,322 1,237 1,148 1,047Intangible assets and goodwill 5,368 5,258 5,258 5,258Investment securities - - - -Other assets 13,653 13,956 14,470 14,597Total assets 23,985 23,345 24,014 24,681LiabilitiesAccounts payables 1,008 911 1,203 1,351Short-term debt 0 0 0 0Other short term liabilities 1,282 1,334 1,455 1,622Total current liabilities 2,290 2,245 2,658 2,974Long-term debt 15,993 15,740 15,594 15,441Other liabilities 3,238 3,353 3,353 3,353Total liabilities 21,521 21,338 21,605 21,768Shareholder equity 2,464 2,007 2,409 2,913Minority interests 0 0 0 0Total liabilities and equity 23,985 23,345 24,014 24,681Net debt 15,503 15,649 14,976 14,145

Per share 12/14A 12/15E 12/16E 12/17ENo. of shares (wtd avg) 454 454 425 425CS adj. EPS 0.56 0.82 1.17 1.33Prev. EPS (US$) - 0.81 - 1.44Dividend (US$) 0.00 0.00 0.00 0.00Dividend payout ratio 0.00 0.00 0.00 0.00Free cash flow per share 0.71 0.89 1.33 1.69Earnings 12/14A 12/15E 12/16E 12/17ESales growth (%) 2.5 (4.0) 1.0 4.0EBIT growth (%) (41.8) 13.1 21.1 13.4Net profit growth (%) (64.6) 46.2 33.6 14.0EPS growth (%) (63.9) 46.1 42.8 14.0EBITDA margin (%) 12.0 14.2 16.0 17.1EBIT margin (%) 9.1 10.8 12.9 14.1Pretax margin (%) 3.7 5.6 7.4 8.1Net margin (%) 2.3 3.5 4.6 5.1Valuation 12/14A 12/15E 12/16E 12/17EEV/Sales (x) 1.77 1.86 1.78 1.64EV/EBITDA (x) 15.2 13.4 11.8 10.6EV/EBIT (x) 19.4 17.3 13.8 11.6P/E (x) 16.4 11.2 7.9 6.9Price to book (x) 1.6 1.6 1.3 1.1Asset turnover 0.5 0.5 0.4 0.5Returns 12/14A 12/15E 12/16E 12/17EROE stated-return on (%) 9.6 14.3 18.1 17.7ROIC (%) 0.0 0.1 0.1 0.1Interest burden (%) 0.40 0.52 0.57 0.57Tax rate (%) (272.7) 28.4 37.0 37.0Financial leverage (%) 6.00 6.18 5.29 4.47Gearing 12/14A 12/15E 12/16E 12/17ENet debt/equity (%) 629.2 779.8 621.8 485.6Net Debt to EBITDA (x) 11.6 10.4 8.7 7.4Interest coverage ratio (X) 1.7 2.0 2.3 2.4Quarterly EPS Q1 Q2 Q3 Q42014A 0.03 0.29 0.44 -0.222015E 0.00 0.24 0.49 0.082016E 0.11 0.30 0.62 0.13

Share price performance

H T Z.N S& P 5 0 0 IN D EX

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

Source: Company data, Thomson Reuters, Credit Suisse estimates

20 January 2016


Avis Budget Group, Inc. (CAR)Price (19 Jan 2016): US$24.73; Rating: OUTPERFORM; Target Price: (from US$54) US$44Income Statement 12/14A 12/15E 12/16E 12/17ERevenue (US$ m) 8,485.0 8,520.2 8,791.8 9,271.4EBITDA 876 907 940 1,000Depr. & amort. (147) (165) (170) (175)EBIT (US$) 729 742 770 825Net interest exp (209) (200) (190) (191)Associates - - - -Other adj. 0 0 (0) 0PBT (US$) 520 542 580 634Income taxes (194) (211) (220) (241)Profit after tax 326 331 359 393Minorities - - - -Preferred dividends - - - -Associates & other 0 0 0 0Net profit (US$) 326 331 359 393Other NPAT adjustments (81) 3 0 0Reported net income 245 334 359 393Cash Flow 12/14A 12/15E 12/16E 12/17EEBIT 729 742 770 825Net interest (209) (200) (190) (191)Cash taxes paid - - - -Change in working capital 280 130 230 230Other cash & non-cash items 1,779 1,869 2,017 2,160Cash flow from operations 2,579 2,541 2,827 3,024CAPEX (2,123) (2,054) (2,296) (2,454)Free cashflow to the firm 456 487 531 570Aquisitions - - - -Divestments 21 8 0 0Other investment/(outflows) (2,646) (2,217) (1,570) (2,109)Cash flow from investments (2,807) (2,385) (1,770) (2,309)Net share issue(/repurchase) (297) (320) (200) (100)Dividends paid 0 0 0 0Issuance (retirement) of debt 524 157 (526) (145)Other (71) (111) 4 0Cashflow from financing activities 156 (274) (721) (245)Effect of exchange rates (23) (29) 0 0Changes in Net Cash/Debt (95) (147) 335 470Net debt at start 2,701 2,796 2,943 2,607Change in net debt 95 147 (335) (470)Net debt at end 2,796 2,943 2,607 2,137Balance Sheet (US$) 12/14A 12/15E 12/16E 12/17EAssetsCash & cash equivalents 624 564 896 1,366Account receivables 599 584 596 630Inventory 0 0 0 0Other current assets 615 828 828 828Total current assets 1,838 1,976 2,320 2,824Total fixed assets 638 663 757 827Intangible assets and goodwill 1,728 1,870 1,806 1,761Investment securities - - - -Other assets 12,765 12,702 12,043 11,748Total assets 16,969 17,211 16,925 17,161LiabilitiesAccounts payables 1,491 1,613 1,693 1,780Short-term debt 28 27 27 27Other short term liabilities 0 0 0 0Total current liabilities 1,519 1,640 1,720 1,807Long-term debt 3,392 3,480 3,476 3,476Other liabilities 11,393 11,500 10,974 10,830Total liabilities 16,304 16,620 16,171 16,113Shareholder equity 665 591 755 1,048Minority interests - - - -Total liabilities and equity 16,969 17,211 16,925 17,161Net debt 2,796 2,943 2,607 2,137

Per share 12/14A 12/15E 12/16E 12/17ENo. of shares (wtd avg) 111 105 102 100CS adj. EPS 2.96 3.14 3.52 3.92Prev. EPS (US$) - - 3.57 4.03Dividend (US$) 0.00 0.00 0.00 0.00Dividend payout ratio 0.00 0.00 0.00 0.00Free cash flow per share 4.12 4.62 5.21 5.69Earnings 12/14A 12/15E 12/16E 12/17ESales growth (%) 6.9 0.4 3.2 5.5EBIT growth (%) 13.9 1.8 3.7 7.2Net profit growth (%) 27.8 1.6 8.5 9.3EPS growth (%) 34.7 6.3 12.2 11.3EBITDA margin (%) 10.3 10.7 10.7 10.8EBIT margin (%) 8.6 8.7 8.8 8.9Pretax margin (%) 6.1 6.4 6.6 6.8Net margin (%) 3.8 3.9 4.1 4.2Valuation 12/14A 12/15E 12/16E 12/17EEV/Sales (x) 0.62 0.64 0.58 0.50EV/EBITDA (x) 6.2 6.0 5.8 5.4EV/EBIT (x) 7.2 7.3 6.6 5.6P/E (x) 8.4 7.9 7.0 6.3Price to book (x) 0.5 0.5 0.5 0.4Asset turnover 0.5 0.5 0.5 0.5Returns 12/14A 12/15E 12/16E 12/17EROE stated-return on (%) 4.6 6.5 6.7 6.9ROIC (%) 0.1 0.1 0.1 0.2Interest burden (%) 0.71 0.73 0.75 0.77Tax rate (%) 37.3 38.9 38.0 38.0Financial leverage (%) 0.67 0.68 0.64 0.59Gearing 12/14A 12/15E 12/16E 12/17ENet debt/equity (%) 420.5 497.9 345.4 204.0Net Debt to EBITDA (x) 3.2 3.2 2.8 2.1Interest coverage ratio (X) 3.5 3.7 4.1 4.3Quarterly EPS Q1 Q2 Q3 Q42014A 0.16 0.68 1.90 0.232015E 0.18 0.84 1.98 0.162016E 0.24 0.88 2.16 0.25

Share price performance

CA R.O Q S& P 5 0 0 IN D EX

A p r - 1 5 Ju l - 1 5 O ct - 1 5 Jan - 1 62 03 04 05 06 07 0

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

Source: Company data, Thomson Reuters, Credit Suisse estimates

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…

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20 January 2016


The Demand OutlookTo 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 industry-specific 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

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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.

20 January 2016


Figure 4: RevPAR Growth Has Held Up Nicely, Expected to Grow MSDs in 2016

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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 FearsThe 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

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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

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Interest Rate SensitivitiesThe 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 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.

20 January 2016


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

2016E HTZ CARAverage Corporate Debt 6,245 3,504

% of Corporate Debt Floating 38% 12%

Average Fleet Debt 10,071 9,066% of Fleet Debt Floating 72% 35%

Total Debt 16,316 12,569Total Debt / 2016 EBITDA 9.5x 13.4x% of Debt Floating 59% 28%

Change in Interest Rates Change in Adj. EBITDA0.25% (1.1%) (0.8%)0.50% (2.1%) (1.7%)0.75% (3.2%) (2.5%)1.00% (4.2%) (3.3%)

Change in Interest Rates Change in Adj. EPS0.25% (3.0%) (1.5%)0.50% (6.1%) (3.1%)0.75% (9.1%) (4.6%)1.00% (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

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20 January 2016


Pricing Should Work Better if Macro Holds UpThe 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

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20 January 2016


Valuation Looks AttractiveFigure 10: CAR and HTZ Forward EV / EBITDA Multiple History

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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

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20 January 2016


Figure 12: HTZ NTM EV / EBITDA and Margins Figure 13: CAR NTM EV / EBITDA and Margins

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CAR NTM EV / EBITDA (L)

CAR NTM EBITDA Margin (R)

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

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

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Figure 16: Scenario Analysis for HTZ Figure 17: Scenario Analysis for CARHTZ Scenario Analysis

Bear Base BullUS volume growth -2.0% 1.6% 4.0%US pricing growth -1.0% 0.4% 2.0%US depr/unit growth 10.0% 7.4% 5.0%Int'l volume growth 0.0% 2.3% 5.0%Int'l pricing growth -7.5% -5.2% -2.5%Int'l depr/unit growth 0.0% -8.8% -10.0%Fleet interest rate 4.0% 3.0% 3.5%

Total EBITDA 1,497 1,715 1,897

Incremental FCF -292 145Total FCF 271 563 708Delta -52% 26%

Share price $9.19 $9.19 $9.19FCF yield 6.9% 14.4% 18.1%

CAR Scenario AnalysisBear Base Bull

US volume growth 1.0% 3.9% 5.0%US pricing growth -1.0% 0.5% 2.0%US depr/unit growth 7.5% 5.0% 2.5%Int'l volume growth 2.0% 4.9% 8.0%Int'l pricing growth -4.0% -1.8% 0.0%Int'l depr/unit growth 5.0% 2.1% 0.0%Fleet interest rate 5.0% 3.7% 4.0%

Total EBITDA 710 940 1,131

Incremental FCF -271 182Total FCF 260 531 713Delta -51% 34%

Share price $24.73 $24.73 $24.73FCF yield 10.3% 21.1% 28.3%

Source: Company data, Credit Suisse estimates 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.

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Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

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 AppendixImportant 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 Closing Price Target Price Date (US$) (US$) Rating 04-Dec-14 61.16 72.00 O * 19-Feb-15 64.83 76.00 05-May-15 53.71 65.00 25-Jun-15 45.84 62.00 04-Aug-15 45.08 55.00 03-Nov-15 46.35 54.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price CAR.OQ

1- Jan- 15 1- Apr- 15 1- Jul- 15 1- Oct- 15 1- Jan- 1620

40

60

80

O U T PERFO RM

3-Year Price and Rating History for Hertz Global Holdings Inc. (HTZ.N)

HTZ.N Closing Price Target Price Date (US$) (US$) Rating 10-Feb-14 25.95 29.00 N * 08-Sep-14 28.50 NR 20-Jul-15 18.02 23.00 O 09-Nov-15 16.44 21.00 17-Nov-15 16.31 22.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price HTZ.N

1- May- 14 1- Sep- 14 1- Jan- 15 1- May- 15 1- Sep- 15 1- Jan- 165

15

25

35

N EU T RA LN 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 activitiesAs 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. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

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Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings DistributionRating Versus universe (%) 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.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.htmlCredit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and RatingValuation Methodology and Risks: (12 months) for Avis Budget Group, Inc. (CAR.OQ)

Method: Our target price of $44 is based on our normalized EBITDA estimate of approximately $940bn at a target EV/EBITDA multiple of ~7.5x, discounted back. CAR has traded at an average of about ~7.3x NTM EBITDA and about ~8.1x LTM EBITDA since 2011. Given the significant upside available to our price target, we rate the stock Outperform.

Risk: 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 RatingValuation 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).

20 January 2016


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