EFTA00295400

J.P.. Morgan North America Equity Research 08 May 2014 Overweight Avis Budget Group, Inc. CAR, CAR US Price: $51.79 1Q14 Takeaways; YE14 PT $59; Leisure & A Price Target: $59.00 Commercial Pricing Is Encouraging Previous: $53.00 This note serves as a follow up to ow first look at CAR's IQ EPS of $0.16 beating our Leisure estimate of $0.06 and the Street's $0.08 (with a range of $0.06 to $0.09). We were Kevin Milota AC surprised to see CAR's -4.1% move today (versus the SPX -0.1%) on what we'd characterize as a very solid print that was driven by solid rental demand and positive pricing (both including and excluding its Payless brand). Additionally, we found Bloomberg JPMA MILOTA <GO> management's commentary on the fonvard pricing environment to be compelling, with J.P. Morgan Securities LLC North American RPD up "at least- +1% (including a Payless brand overhang of 50bps) and commercial pricing expected to grow 1% as well. The commercial pricing inflection point came as a pleasant surprise to us, and likely not factored into investor models as well. We reiterate our OW rating and are taking our YE14 price-target to $59. While CAR has been a strong performer year-to-date, we continue to see upside in the name on what we think will be a story driven by better pricing, and sustained free cash flow generation which will allow CAR to consistently invest in its business 002 AIM — kiln brit and return cash to shareholders. We acknowledge the rental car business is a volatile - CAB slim pea g) - RTY porn model, with many moving pieces, but we believe that two substantial contributors to YID 1m 3m 12rn pm-tax income—RPD and Volumes—are on the upswing, and we are not overly Abe 44.8% .05% -62% 73.6% concerned about the used car market and residual values. Rel 182% 4.5% -12.1% 37.7% Why is CAR's pricing up only +1% in FY14? Management addressed this on the call, and the answer is threefold, I) the tough winter created incremental insurance replacement demand, which tightened industry fleets more than previously expected in IQ, and this dynamic is unexpected to unwind through the remainder of the year. 2) Given CAR's shorter booking window it only has a - tiny- portion of its summer reservations booked at this point (during the Q that generates -65% of FY EPS). 3) CAR's pricing N.A. RPD guidance of +1% includes Payless, which is expected to be a -50bps pricing headwind. Leisure pricing commentary remains encouraging. CAR expects pricing for FY14 to increase "at least" +1% in North America, on rental day growth of +4-6%. CAR's 1% RPD guidance includes the Payless brand, which is expected to be a 50bp overhand on the pricing environment in 2014. Leisure pricing and demand was solid in the Q, as CAR posted solid results in the Q with rental day growth of +5%, and RPD up +2% (excluding Payless), and +II% rental day growth and RPDs of +I% (including Payless). CAR continues to lead price increases for the industry, where it has seen "moderate" success. Vehicle mix continues to benefit CAR, with specialty and premium vehicle revenues growing +13%. Avis Budget Group, Inc. (CAR:CAR US) FYE Dec 2012A 2013A 2014E 2014E 2015E 2015E Company Data (Prey) (Curd (Prey) (Curt) Price ($) 51.79 EPS Reported ($) Date Of Price 08-May-14 O1 (Mar) 0.12 0.08 0.06 0.16A 52-week Range ($) 56.05-26.57 O2 (Jun) 0.94 0.50 0.59 0.61 Market Cap ($ rim) 5,831.55 O3 (Sep) 1.46 1.48 1.82 1.84 Fiscal Year End Dec 04 (Dec) (0.07) 0.15 0.27 0.25 Shares O/S (ran) 113 FY 2.44 2.20 2.74 2.87 3.55 3.71 Price Target ($) 59.00 Bloomberg EPS FY ($) 2.42 2.17 - 2.71 - 3.46 Price Target End Date 31-Dec-14 Source: Company data. Bloomberg. J.P. Morgan estimates. 13kamberg' above denotes Bloomberg consensus estmates. See page 16 for analyst certification and important disclosures. J.P. Morgan 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. www.jpmorganmarkets.com EFTA00295400 Kevin Milota North America Equity Research 08 May 2014 J.P.Morgan • Commercial pricing has turned and expected to grow +1% in FY14. From a commercial perspective, CAR posted solid results in the Q with rental day growth of +3%, and RPD up +2% (excluding Payless), and +3% rental day growth and RPDs of +2% (including Payless). CAR expects commercial pricing to post "at least" a +1% increase year-over-year for FY14. IQ Results benefited from the work that CAR has done to take up rates with its commercial accounts (during contract renewal periods) and to shift its mix of business to more profitable customers/channels. Small business accounts experienced revenue growth of +8%, where the rates are tied—though at a discount—to the prevailing leisure rates (which also experienced growth). In April, 100% of the commercial contracts that CAR renewed were at equal or higher prices (versus the 60% rate on 4Q13 call), which is certainly a positive data point, but likely an unsustainable percentage renewal level. • Fleet depreciation expense was +1.6% higher than our estimate. CAR's net fleet cost/unit/mos came in at $304 versus our estimate of S298. In N.A. net fleet cost/unit/mos grew +7.6% year-over-year to $299, which was lower than our $303, though internationally, net fleet costs were higher than our estimate. • Net fleet costs to grow +2% to +5% worldwide and -+2% at the mid-point in North America. CAR's guidance for per-unit fleet costs worldwide are $295 - $305 per month, and $300 - $310 per month in North America. Management continues to expect residual values to decrease by roughly two points in 2014. At YEI3, residual values as a percent of net purchase price stood at —82%, which is consistent with historical noires, versus the outsized levels in 2011 and 2012. CAR believes the used car market will see good demand in 2014 on the heels of a growing U.S. economy and given the availability in consumer financing at rates that still low by historical standards. The supply of off-lease vehicles is expected to increase in 2014, which will have a mild dampening effect on used car prices. The company believes it should be able to mitigate the impact of higher off-lease vehicle supply through fleet utilization increases, shifting cars to Payless brand (and lengthening the holding period of those cars) and divesting cars through its expanded alternative distribution channels (direct to dealer, and direct to consumer via AutoNation). Program cars will comprise —60-65% of CAR's NA fleet in 2014. • Total rental days beat our estimate. CAR's total rental days increased +6.1% as they came in at 28,883 versus our estimate of 28,387, or a 1.7% beat versus our estimate. N.A. rental days increased +7.1% coming in at 21,129 versus ow 20,512 estimate, or a 3.0% beat. For North America, excluding Payless, rental days increased +4%. International rental days +3.4% coming in at 7,754 versus ow 7,875 estimate, or a -1.5% miss. • T&M pricing in the Q was slightly softer than we expected, but ancillary spend made up for the shortfall. CAR's North American T&M RPD was $41.77 +1.0% year- over-year. Excluding Payless, in North America, T&M revenues were 1.9%. Worldwide T&M RPD was flat on a total company basis and excluding Payless. • Rental car utilization was higher than we expected. We are pleased to see total rental car utilization up +14Ibps year-over-year ending the Q at 70.2%. By region, North America utilization increased +14Ibps, and International utilization was up +I37bps, year-over-year. • CAR bought back $75m of its shares in the Q at an average price of $46.88. Included in its guidance, CAR stated that it expects to repurchase 8200.300m worth of shares in 2013, so an additional $125-225m of stock excluding the repurchases made to date. CAR's priorities for its —$400m in free cash flow that it expects to generate in 2 EFTA00295401 Kevin Milota North America Equity Research 08 May 2014 J.P.Morgan 2014 are I) tuck-in acquisitions (such as Budget & Payless licensees) but likely won't spend more than $100m on those investments and 2) share repurchases. We are modeling $300m in share repurchases in 2014-2016, though believe given CAR's stated net corporate leverage target of 3-4x that it has substantial capacity to buy in more stock. Using our 2014-2016 estimates as a guide and assuming a 3.5x net corporate leverage target, we believe CAR's debt capacity is —$382m, —$1.064B and —$1.750B, respectively. • FY14 guidance. Revenues $8.4-8.6B (from 58.3-8.5B), EBITDA $825-900m (unchanged), WW fleet costs of 5295-305 (unchanged), diluted EPS of 52.50.2.95 (from 52.45-2.85). CAR reiterated its $18+ EBITDA target for 2015. • We are tweaking our estimates following earnings, as ow FY14 adjusted EPS estimate goes to $2.87 (from $2.74) on rental car volume growth of +5.4% and T&M RPDs of 0.2%. Our FY 15 goes to $3.71 (from $3.55), on rental car volume growth of +4.0% and T&M RPDs of +0.9%. • Our year-end 2014 price target goes to $59 (from $53). We are taking our year-end 2014 price target to $59 (from $53), which is derived by using a 16.0x target multiple (from 15.0x) on our 2015 EPS estimate of $3.71 (up from $3.55). We believe a premium multiple to the SPX's 2015E P/E multiple of 14.3x (Bloomberg consensus), is warranted given CAR's +25% EPS CAGR (from 2014E-2016E), driven by a more rational pricing environment for the rental car business in general, the inflection point in pricing for the commercial side of its business and the company's significantly improved European operations. • Read on, for quarterly earnings comparison versus our estimates, valuation, key driver sensitivity analysis and full model. 3 EFTA00295402 Kevin Milota North America Equity Research 08 May 2014 J.P.Morgan Investment Thesis, Valuation and Risks Avis Budget Group, Inc. (Overweight; Price Target: 559.00) Investment Thesis We reiterate our OW rating. We continue to believe that CAR is being undervalued given its EBITDA, EPS and FCF growth profile. We acknowledge the rental car business is a volatile model, with many moving pieces, but we believe that two substantial contributors to pre-tax income—RPD and Volumes—are on the upswing. We believe the pricing environment will continue to play out nicely as we move through 2014, and look to a stronger GDP environment to drive incremental rental demand during the year. While used car values, and their impact to residual values, remains a concern, we think CAR has put structures in place to mitigate some of the impacts to EPS and EBITDA, versus years prior. Valuation We are taking ow year-end 2014 price target to $59 (from $53), which is derived by using a 16.0x target multiple (from I5.0x) on ow 2015 EPS estimate of $3.71 (up from $3.55). We believe a premium multiple to the SPX's 2015E WE multiple of 14.3x (Bloomberg consensus), is warranted given CAR's +25% EPS CAGR (from 2014E-2016E), driven by a more rational pricing environment for the rental car business in general, the inflection point in pricing for the commercial side of its business and the company's significantly improved European operations. Figure 1: CAR YE14 Price Target Methodology $ in millions Existing Valuation Valuation Multiple Sensitivity Analysis 2014E 2015E 2018E 2015E Recurdng EPS 2.87 311 4.45 3.71 3.71 3.11 x Inolled/Target MUlpie 18.1x 14.0x 11.IN 15.0x 16.0x 17.0x I• YE14 Price Target $58 $59 $83 I CurrentRice =EMS 51.79 51.79 51.79 51.79 51.79 Appreciation Potential 8% 15% 22% EV/EBITDA Multiple Approach 2015E EBITDA 1,018 1,018 1,018 Target Multiple 8.3x 8.7x 9.1x = Enmtp.lse Value 8,475 8,873 9,272 Less Net Debt(EOP 2015) 2,499 2,499 2,499 = Equty Value 5,976 6,375 6,773 Average Dilulad Shares 107 107 107 YE14 Price Target $56 $59 $63 I Source: J.P. Morgan estmates. Given the emerging free cash flow story for CAR, we believe that free cash flow yield is a relevant metric for investors to consider. Presently, CAR is trading at a 6.7%, 8.6% and 9.9% free cash flow yield on ow free cash flow estimates for 2014E-2016E, which is a inline, +186bps and +314bps premium to the average SPX free cash flow yield. We believe this gap is too high, given the company's EBITDA growth profile, which is expected to grow 15% in 2014 and 2015, respectively. 4 EFTA00295403 Kevin Milota North America Equity Research J.P.Morgan 08 May2014 Figure 2: CAR FCF per share analysis tin millions JPMe FCF Estimates 2014E 2015E 2016E Free Cash Flow 401 514 591 Free Cash Flow! Share $3.48 S4.45 55.12 CurrentFree Cash Flow Yield 6.71% 8.60% 9.88% Discount/ Prenium ti Avg. SPX FCF Yield -0.03% 1.869b 3.14% I= YE14 Price Target S59 Estimated Yield at Price Target 8% Sensitivity to FCF Yield Chgs. I Implied YE14 PT 7% 6% _ 5% +100bps of Yields = 569 581 599 $ Change to YE14 PT S9 S22 540 Source: J.P. Morgan estmatae. etcenterg. Valuation remains compelling, in ow view, as CAR is presently trading at 18.1x, 14.0x and 11.6x our 2014, 2015 and 2016 EPS estimates, respectively. Historically, CAR has traded at an average discount of 4.0x to the SPX, and currently stands at 1.1x. Since January of 2009, CAR has traded at an average forward PIE multiple of 9.3x, with a low of 0.4x (in February 2009—recent trough multiple) to a high of 14.5x (in September 2009— recent peak multiple). On an EV/EBITDA basis, CAR is presently trading at 9.8x, 8.3x and 7.2x our 2014, 2015 and 2016 estimates, respectively. Since 2006, CAR's average forward EVIEBITDA multiple has been 7.5x, with a high of 9.8x (in December 2008) and a low of 4.8x (in December 2011). Figure 3: CAR PIE and EVIEBITDA Valuation Sin millions Historical PIE Ratio EPS PIE CAGR Realized EPS Consensus Esbnats Year EPS Growth Multiples PEG 2014E-2016E 1-Yr. Fwd. 1•Yr. Fwd. 2•Yr. Fwd. 2016E 4.45 20% 11.6x 0.6 24.6% LT Average LT Average LT Average 2015E 3.71 30% 14.0x 0.5 9.3x 11.4x 7.8x 2014E 2.87 30% 18.1x 0.6 Historical EVIEBITDA Year Mkt Cap Net Debt EV EBI1DA EVIEBITDA Since 2009 2016E 5,977 2.208 8,185 1,131 7.2x LT Average 2015E 5,977 2,499 8,475 1,018 8.3x 7.5x 2014E 5,977 2,713 8,689 884 9.8x Source: J.P. Morgan estmatee Risks to Rating and Price Target Car Rental Earnings Could Be Volatile While our near-to-medium term outlook for the Industry (and CAR earnings) is favorable, it is possible that quarterly earnings may prove volatile. For example, airline enplanements could be affected by terrorist threats; the company's transaction volumes may fall short of expectations if competitors use opportunistic pricing 6 EFTA00295404 Kevin Milota North America Equity Research OK May 20 Id J.P.Morgan (particularly, in leisure markets) to gain sham (perhaps, to address bloated fleet levels). Further, decreases in levels of airline passenger traffic, given that CAR derived -71% of time and mileage revenues at on-airport locations in 2012, could materially adversely affect the company's financial and operating performance. In addition, as mentioned earlier, short-term declines in used car prices could also affect results. Economic Risks Could Impact Rental Car and Equipment Rental Demand Given the high correlation between rental car demand and GDP growth, we believe that a sluggish recovery in the U.S. or global economy could impact demand for CAR's business segments. Should the company not effectively match its fleet levels with demand, that could lead to over-fleeting, which would have downward pressure on pricing and financial results. CAR's truck rental business can also be impacted by the housing market. If conditions in the housing market were to weaken, CAR may see a decline in truck rental transactions, which could have an adverse impact on its business. Additionally, key risks facing all leisure and travel-related companies include terrorism, geopolitical, and weather-related uncertainties that could severely curtail travel volume and spending levels. Highly Competitive Marketplace Could Lead to Downward Pricing Pressure While the industry is effectively an oligopoly, with three large competitors (HTZ, CAR and privately held Enterprise), CAR's business segments are highly competitive. Price is a significant competitive factor for the car and equipment rental business, and increasing prices could prove challenging. If CAR tries to increase prices, its competitors, some of which have greater resources and better access to capital (i.e. Enterprise) may seek to compete aggressively on price to gain a competitive position in a market, or to offset reduced rental demand. In a downward or overly competitive pricing environment, if CAR does not reduce its operating costs then its margins, financial results and cash flow could be at risk. The risk of competition on the basis of pricing in the truck rental industry can be even more intense than in the car rental industry because it can be more difficult to reduce the size of its truck rental fleet in response to reduced demand. 6 EFTA00295405 Kevin ablate North America Equity Research J.P. Morgan 08 May2014 Figure 4: CAR FY14 Guidance & JPM Estimates S in millions FY14E (as of 4013) FY14E (as of 1014) High-end Low-end Mid-point HIgh-end Low-end Mid-poInt %Chg. JPM Est. % IIigh!(Low) Revenue 8.3a) 8.500 8.400 8.400 8.600 8.500 1.2% 8.498 1% EBITDA 825 900 863 825 900 863 unchanged 884 3% NW Fleet Costs 295 305 300 295 305 300 unchanged 303 1% NA Fleet Co% 300 310 305 300 310 305 unchanged 305 0% Interest Expense 220 220 220 215 215 215 -2.3% 215 -2% Non-vehicle D&A 150 155 153 150 155 153 unchanged 153 1% Pretax Income 450 530 490 455 535 495 1.0% 516 5% Diluted EPS $2.45 $2.85 $2.65 $2.50 32.95 32.73 2.8% 32.87 8% NA RAC Segment: Rental Days 3% 5% 4% 4% 6% 5% 100bps 5% Pricing 1% 1% 1% 1% 1% 1% unchanged 1% Source: Company reports. EFTA00295406 Kevin Milota North America Equity Research 08 May 20 Id J.P.Morgan Figure 5: CAR Financial & Operating Results Summary, 1Q14 $ in millions CM Actuals J.P. Morgan Estimates Change Difference A: LI Ail I NI% IIts. M £ NIjjjIlte Vehicle Rental Revenue 1.261 1.203 58 4.8% 1.264 (3) -0.2% Other Revenue 533 474 59 12.4% 500 33 6.7% Lprer 68 14 54 na 83 (15) -16.3% Net Revenue 1,862 1,691 171 10.1% 1,846 16 0.8% 'Total Expenses 1,836 1,686 150 8.9% 1,835 1 0.0% I 'Income (loss) before income taxes 26 5 21 420.0% 11 15 134.9% Proveron br (benett from) income taxes 8 -4 12 -300.0% 4 4 90.2% :J.Y kan., 30.8% 40.0% 38.0% Adjusbd Net Income(loss) 18 9 9 100.0% 7 1I 162.3% 'Adjusted EPS $0.16 $0.08 $0.08 95.7% $0.06 50.10 167.8% I Shares Outdandrig - Druled ix Adjusbd EPS 113 110 2 2.2% 115 (2) -2.1% 'Adjusted EBITDA 117 93 24 25.8% 101 16 15.7% I Lai TO): Marg ,: 6.3% 5.5% 5.5% CAR Muds CM Meals Change Difference Income Statement Expense Drivers: 1 14 1 13 I %I% Pls. jvj 1 %i % Renbl Days (000s) 21.129 19,723 1,406 7.1% 20,512 617 3.0% TOO 8 Mileage Revenue per Day $41.77 $41.34 $0A3 1.0% 541.75 0 0.0% 'Total NA. Revenue $1,236 $1,098 138 12.6% 51,224 12 1.0% I Fleet Ullealon 70.7% 69.3% 1.41% 69.8% 0.9% 1.3% Rental Days (000s) 7,754 7,500 254 3A% 7.875 (121) -1.5% Time 8 Mileage Revenue per Day $42.86 $43.89 ($1.03) -2.3% $43.89 (1) -2.3% 'Total Intl. Revenue $551 $517 34 6.6% $546 5 0.9% I Fleet Ullealon 68.8% 67.4% 1.37% 67.4% 1.A% 2.0% Renbl Days (ODDS) 28.563 27,223 1,660 6.1% 28,387 496 1.7% Time B lAieage Revenue per Day $42.06 $42.05 $0.01 0.0% $42.35 (0) -0.7% 'Total Car Rental Revenue $1,719 $1,601 118 7.4% $1,687 32 1.9% I Fleet Ullealon 70.2% 68.8% 1.41% 69.1% 1.1% 1.5% Renbl Days (000s) 824 853 (29) -3.4% 810 14 1.7% Time 8 Mileage Revenue per Day $74.18 $71.03 $3.15 4.4% 576.00 (2) -2.4% 'Total Revenue $75 $76 (1) -1.3% -1.6% I Fleet Ullealon 39.4% 35.2% 4.18% 35.7% 3.7% 10.3% Source: Company repods and J.P. Morgan essmates. 8 EFTA00295407 Kevin Milota North America Equity Research 08 May2014 J.P.Morgan Sensitivity Analysis to CAR's Key Drivers Figure 6: CAR EPS Sensitivity Analysis to Change in T8M Revenue per Day (RPD) $ in millions +1% Change In RPD 2014E 2015E 2016E Total U.S. Tine 8 Mileage Revenue (58) 3,844 4,034 4,196 /Transaction days 93,842 97,596 100,523 =RPD $40.96 541.33 $41.74 x 1% Change 1% 1% 1% = New RPD $41.37 541.74 S42.16 Hypobeical Inaemenlal Revenue (Sm) $38.44 540.34 S41.96 Assured Flow-hru b prebx 90% 90% 90% Equals pre-tax sensivity to 1% neve in RPD Sm $34.59 $36.30 $37.77 Total Intl. Tine & Mieage Revenue ($8) 1.646 1,724 1,793 Transaction days 39.418 40,995 42,430 =RPD $41.76 542.05 $42.26 x 1% Change 1% 1% 1% = New RPD $42.18 542.47 $42.68 Hypobeical Inaemental Revenue ($m) $16.46 517.24 $17.93 Assured Flow-hru b prat 90% 90% 90% 'Equals pre-tax sensivity to 1% nova in RPD (Sm) $14.82 $15.51 $16.14 Equals pre-tax sensivity to 1% nova in RPD Sm $49.41 $51.82 $53.90 Shares 112 107 103 Annual Per Share Impact post tax (assuming 38% tax rate) $0.27 $0.30 $0.33 Assured TargetMulfple 16.0x 'Hypothetical Change in Equity Value $4.80 Note: Assumes 16.0x target multiple. Source: J.P. Marganestroates. 9 EFTA00295408 North America Equity Research Kevin Milota 08 May2014 J.P.Morgan Figure 7: CAR EPS Sensitivity Analysis to Change in Rental Days S in millions +1% Change in Rental Days 2014E 2015E 2016E N.A. RPD Assurrobon 54 55 55 I Rentel days 93,842 97,596 100,523 = NA RAC Revenue $5,093.90 $5,349.41 $5,564.99 x 1% Change in Volumes 1% 1% 1% = New Renbl Days 94,780 98,572 101,529 Hypohelcal Incremental Revenue ($rrl $50.94 $53.49 $55.65 Assumed Flowtru to pretax 30% 30% 30% Equals pre•tax sensivity to 1% move in RPD (Sm) $15.28 $16.05 $16.69 I inl. RPD Assumptcn 69 69 70 / Rentel days 39,418 40,995 42,430 = Int RAC Revenue $2,705.86 $2,847.26 $2,981.30 x 1% Change in Volumes 1% 1% 1% = New Renbl Days 39,812 41,405 42,854 Hypohelcal Increment3I Revenue ($n6 $27.06 $28.47 $29.81 Assumed Flowtru to pre•tax 30% 30% 30% Equals pre•tax sensivity to 1% move in RPD (Sm) $8.12 $8.54 58.94 Equals pre•tax sensivity to 1% move in RPD Sm) $23.40 $24.59 $25.64 Shares 112 107 103 Annual Per Share Impact post tax assuming 38% tax rate) $0.08 $0.09 50.10 Assumed Target Multple 16.0x Hypothetical Change in Equity Value $1.49 Nolo. Assumes 16.0x target multiple. Source: J.P. Morgan estrriates. Figure 8: CAR EPS Sensitivity Analysis to Change in Residual Values S in millions 2014E 2015E 2016E Change In Residual Value 1% 1% 1% x Average Value of Risk Vehicle at Disposlon $16,000 $16,000 $16.000 Change In Residual Value $160 $160 $160 / Average Hold Period (rronhs) 16 16 16 Fleet Cost per Month Impact $10 $10 $10 x Risk Cars in NA Fleet(62.5% in la. 65% in 15) 223.268 239,820 244,652 Monthly Impact of 1% Change In Residual Values (Sri* $2.23 $2.40 $2.45 x 12 12 12 Annual Impact of 1% Change In Residual Values ($rrt, to NA. pretax $27 $29 $29 Annual Per Share Impact post tax assuming 38% tax rate $0.15 $0.17 $0.18 Assumed TargetMuttple 16.0x Hypothetical Change in Equity Value $2.66 Note Assumes 16.0x target multiple. Source: J.P. Morgan estmates. 10 EFTA00295409 Kevin Milota North America Equity Research OE May 2014 J.F!Morgan CAR Model with Drivers Figure 9: CAR Income Statement $ in millions 1012 1013 2013 3013 4013 2013 1014 20146 3014E 4010 2114E NUE 2011E woe WelRune 5297 1.203 1)62 109 1244 5,461 1,261 100 1145 1)17 5243 9467 6315 cooratedia ace 474 SU (61 MI 2230 533 603 102 955 2,349 2.501 2618 The , 14 76 42 74 216 60 81 91 02 VS 358 304 SI armee 7.X? 1.01 2242 1,315 1,00 7937 1,602 ;144 2510 1.135 8418 pa 1,327 /:.r'. C,.; n 7. :J. 710+. nn. 4 .] k sit 5 V. i5'.. otoscoords0444(444 3.624 918 937 1948 91 3254 937 NI 1.123 99 ' 4132 4.91 4.301 EPCMc004 is ' ni ' id 63 219 0 7fi 82 74 265 322 363 box rests 4 0 0 .1 " 0 -Io -Io .$) ' 45 ' -To ' vetch Dhows*, 4 Lome Chasm se 1171 US 470 524 Cl 1110 493 505 552 465 ' 11)33 2017 2601 0653 gotta I aktr44914 925 224 274 274 248 1120 20 297 234 265 ' 1.101 LIM 1222 Ven9rtniel. /44 293 57 66 72 0 244 64 07 71 42 ' aeo 250 392 licavereSt Mad DU . 110 30 ' 31 ' 33 38 532 ' a 36 39 43 . 19 ' 166 183 Iran copone cnCcrpyaleat4 248 56 55 57 58 229 ' S 53 9 53 ' 215 209 20 Ohm 0 0 0 0 0 0 0 0 0 0 0 0 0 feblE4penses IAN IAN tme me torso opt Imo tost tans tee ' /AO 1283 6,501 r. H.2% Sri '23% n A 75% 92% 89% 63% 496 42% .. . J.+. adonithuituto osmium ' NI 5 94 205 18 ' 410 ' a 112 333 45 ' 5* ' 443 780 Prs.411:ner anrairran boa tots . 171 4 36 122 I . I% ' a 43 in ir ' Iss 244 281 7.: . Vi;d4 4ii*, 410 56% 37" ' 394• 3139 34.3% 34.3% 379•4 ' MO% 314% 0.9.4401.4, rramelusg 281 9 56 171 17 2% ' 9 0 an 28 ' 321 358 458 34491#1849 12.44 NA 44.50 ' $148 MI5 3110 sue Nil SIM 5625 SW 13.11 5/45 0 c% 425% 1.1•4 ONO% -NO% 957% 171% 74" 72" 3:34 no, 14n-nortnj.1p9nrtenctinTII 45 46 45 410 , WARW.Irccere11330 29 .06 .26 III .28 . II Ill 69 Z6 19 321 358 458 9.4419 1S•DNS 529 4040 024 5112 ' 0113 50.14 Sall 5061 014 #25 52.0 5111 MA stirdsooairory • DIM tathOUEPS 122 110 116 116 115 115 . 113 ' III ' 112 ' 110 .. 112 ' 107 ' KO ' Source: Company Rings. JP. Ragan Homes. EFTA00295410 Kevin Milota North America Equity Research 08 May2014 J.F!Morgan Figure 10: CAR Adjusted EBITDA and Income Statement Expense Drivers $ in millions Inas Sigma'Eagan Dthm: 2812 143 2013 1013 4013 1011 1014 2011E 201E 1014E 2111E 2115E 2011E von Jowl ttin ircre syss 442 5 91 293 18 410 26 112 3)3 45 613 738 • f 3", 03% 4 ,, R1, . . 525 ft" 3 1', t". ',•-• 13% 1155.0•51/ nab! D81 110 20 31 34 13 132 35 38 31 43 153 146 183 limn' 44p4Asa .54, Caws a& 24 SS SS SI 93 221 56 53 53 53 215 209 210 Wet 0 0 0 0 0 0 0 0 0 0 0 0 0 ldpsud (811113 110 93 180 203 114 711 117 281 424 141 en 1 111 7.73! 5.5% 9.0% 110% 67% 9.1% 63% 34% 70% 7.1% Wei -1'6% 42.3% 16% OS 4.24 150% 719% *5% 245% 7424 Ay". 41 Total Ae: Rea / .4 144% 465% 44.0% 50 4% 4.1% 503% 484% 411% SON 474% 46 8% 49 v• .. .. . • :26% 138% 21.9% 729% 221% 233% 235% 21.7% 226% 717% 226% 223' ,..,. ,,..:. '32% IV% ' 11.4% 134% 12.5% 233% /18% NO (31% /51% Me% 1515. 594w/rnAAA AA 31% 30% 37% 39% 34% J2% 29% 32% 33% 33% 32: lioi.WMMoSOLA I.8% 1,5% 14% 21% 12% 19% 11% 0.5% 22% 1.8% IS% IA% Aiwa *Amu. in Co,70-.0. ...., 34% 27% 24% 31% 29% 30% 15% 27% 27% 25% 13% 2.t% OW 10% 00% 00% 00% an an 00% 00% PO% 00% 00% DO% now Me Slit 401108 411.01 510119 172.530 MAN 512384 CSNI SAM NON WM OMR 547203 558031 5.4>Y% CA; 394 1.0% 43% 3.1% 34% 29% 3!% 39% 33% 39% 29% 2.0s Venn Cesenann 8 temComm o7t 1471 SIB 470 524 424 1410 413 505 550 446 1103 2917 2081 5.4>Y% CA; .,., 3% 114% 42.5% 20" 107% 230% 177% 40% Si% 4.3% 68% 30% 3A.; Rift De9•03/32. pr nrili 24$ 279 tie 331 296 ni no 302 8)5 30) NS 9)7 310 vo.v % No 46% 723% 399% ' ISO% 24% 169%' 90% O8% n% 15% IA% 13% 1. 7% toduttenhow nog 122103 312031 358149 308981 317.210 342430 324210 379.541 398499 327.604 957229 9$1.55 37133) 1.11/019•Denteor Stone 07mtv on 945 251 325 346 293 122? 284 314 933 303 1337 1.36. 1.105 NA nnimpooncn trod 230 . 278 . 202 ' 335 sia as ' re ' sei ms 311 335 318 311 Y.o.1% CA2 i7% 251% 696% .. 15 0% 6.9% 144% 74% 0.0% to% 14% 21% 70% 10% %no ''3% 459% 425% noncinnin. 2970 3.340 3.5(0 3823 MN 8533 360 3110 UM &RN 3132 3141 8723 /on. CA; !9% 773% 399: 15.0!,. 74% 38.5% 90% 0d% II?. 73% 18% !3% Coe Dna Minim Conran 31124 918 KT 1148 931 UM NT 984 1.123 in 1102 4.131 1.34 211411Coset 0 TO 74 63 220 03 if 62 71 295 322 353 Ten OnMitrangEarn 31124 921 1.007 1.142 991 4.014 1.030 1972 1.205 1.050 1327 4350 4267 Ai %cePen,u, ''3% 33 1% ”N 47n 5)6% 513% 532% 5 0% 475% 537% 509% 534% 499 Cad 006%4 En/Asa s rEtcall 0851 33,4 322 211 Ns 335 215 31,5 212 729 302 Ha Bil 29.4 NM OncItnning Comes 027%1 1132 251 272 334 248 ' 1.101 270 271 311 271 1.128 1.143 1.106 TOY % CIA 2.14% 1314 5714 10214 55% 4198 2.6% OS% Aft AN ' 24% 1.3% It4 nun titinnenvire Emma 073%1 ' 2.712 670 6131 MO en ' 2613 6131 Jr 812 2113 ' 2923 3/337 3.144 non Om 125119 20176 33285 16501 30.20 13049 21707 38293 424 31.713 137929 142203 141571 Vann OtosenavoEwan oRea Dan 22 239 215 202 222 219 no 214 24.2 22.2 213 21.,4 21.4 VOA CIA 10 04 0.9 .09 -1.5 4.6 -00 4.1 41 as 42 00 01 Vol.% Chi 45% 1.9% -In .2.5% 41% .1.9% 45% 44% 44% 43% J1% 01% 0.4% Um costas% AR/wt. 923% 921% son en 971% nes son WM 900A r sant cam 907% Some: Company flings, JP. µer990 esbrnmes. 12 EFTA00295411 Kevin Mors North America Equity Research 08 May2018 J.P.Morgan Figure 11: CAR Income Statement Revenue Drivers Sin millions 2012 1013 2013 3013 4013 2113 1014 240E 3011E 40146 XI* 20156 20116 Mani arks Cm Ftwiai 619/5 (D:CS: 85,951 19,723 23.916 25.511 20836 (06% 21.129 21.512 26631 21.699 93842 97.595 101523 54% 75% 20% 54% 4 55% ' 16% 73% 6.5% 40% 40% 53% ' 4.0% 3.0% Titre I 1,113996 Revertre WON $1615 341.34 93916 91217 938.39 $40,51 311.77 93915 18249 839.77 940.92 HIM $11.74 -:.> 7 % C',7 .2.4% 3.9% 4 .02% 4 4 4% asgh i.ceh ' Lox cox us 10% ' 1.0% /A% lime 8 184ne Reterte $1457 1815 $03.1 $1.073 4821 S3213 1883 $872 $1.127 5962 21144 14134 14,196 7.6% 55% 33% 52% 40% 45% BS 7.6% 5.9% 50% 64% 4.9% 4 0% 01..er Rayne $1,183 $269 . $228 $345 $270 $1,183 $285 $122 $362 $284 $1,254 $1,318 SIMI eta Remenatflered Day 132 13.6 118 125 13.0 13.3 115 13.1 132 13.1 13.4 115 13.6 v.66/ % 6,9 28.4% 14% 3.2% 20% -ON 00% 62% 7.6% 5" 50% 60% 09% 1.0% .22 2., 61 tme 6 142.2924 Re5e59e 242% 319% 331% 321% 330% 323% 32.3% 311% 32I% 310% 326% 32.6% 324% Docar Revenue 3279 514 ' $75 $82 $74 5745 $65 $84 491 $82 $33 1358 $394 7.3% 49% 4.`. 7.3t 1 11.0% 9 11.0% 4 11.0% ' 209% 204% Total Rennin $4.140 $1.449 ' $1.279 WM $1.163 $5243 $1,235 $1,378 11,589 $1,228 WO 56,742 1811i 63% 58% 80% 105% 99% 87% 12.6% 7.8% 54% 54% 76% ' 52% 4.4% /amp Rent.4 Net 323.188 312284 358.983 390966 317.210 342430 328230 379,581 393499 327404 357»9 361965 376341 ... .. • , ,[. 6.06 74% 79% 59% 4.6% 40% 56% 5.7% 33% 33% 43% 33% 7.6% Nil lAl2.0»n 715% 593% 705% 72.5% 714% 71.3% 70.7% 710% 733% 71.1% 770% 715% 731% D;c34.14041681104 $16 $1 $5 $13 $11 $26 $5 sa $9 sa 131 $36 $41 tlirc,v. 59% 7.1% 79% 984 149% 206% 74% 1610% 1010% IRO% 14% 41% 104% RetellDrs 811039) 35.551 7500 9,312 11.950 8898 37108 7.754 9124 12.727 9.113 39418 (0905 42.430 ro.Y% Cto 952% 43% 57% 79% " 604 52% ' 34% 1 55% 65% 55% 54% . 49% 3.5% Tkne8 IlMega Revena pa Oar 14335 $43.10 $41.79 $42.11 $4250 $42.57 $4256 641.16 $41.48 $4125 $41.191 $4266 $4226 5,,,,Y% C6v -135% J.3% .23% ' 45% @2% .1.9% .2.3% .6.3% .6.3% .63% J.7% 9.3% 0.3% TIMI) 4 laneRIMS $1,535 4329 $A $503 $367 $1.559 $332 $44 $533 $351 $1,546 $1.724 $1793 Y-6.Y % 6,0 726% 46% 33% 64% 37% 33% 1.6% 39% 49% 39% 36% 4,7% 40% 011er Rem= $804 $188 $232 3283 4232 MI 2219 $259 $920 $258 $1.057 $1.123 $1.188 0901~91‘4.48113iy 22.6 250 24.9 217 251 25.0 282 26.4 25.2 783 28.8 77.4 260 YGY % C6v 1334% 70% MN 230% 192% 293% 16.4% 179% 733% 11.4% 111% 724 22% 3% '-iCi ten. & /Atn;e Rem« 52.2% 571% 506% 562% 632% 59.6% 65.8% 841% 607% 67.7% 642% 651% 68J% Total Rivenue $2142 $517 MI PH $149 $2223 $551 UM $544 WO 12,703 $2.547 $7251 88.9% 1.435 73% 118% 89% 77% 66% 5.9% 7.9% 68% 71% ' Sr . 4n4 keno» AM 511» 139.348 122250 145,538 173155 136303 145.282 123465 154595 185252 145210 152479 157.395 151.325 YGY % of 91.8% 3.5% 16% 48% 12% 42% 1.3% 5.5% 6.5% 55% 3.551 33% 2.5% Fled Ullaka 691% 874% 89.8% 74.7% 67.9% 795% 682% 191% 74.2% 07.9% 799% 714% 77.9% Renal Om IOC(%) 121.505 V223 32320 37.481 29.474 7 126488 31.33 34238 39258 30203 7 193.260 131590 142.953 v--..-1', C•0 720% 1.0% 30% 6725 57% 41% 61% 6.2% 46% 44% 54% <041 31% Terre& Alkape Reveme pee Day 7 $41.07 44205 $3199 142.01 $4022 7 $41.10 ' MN 17 $10.05 ' $4218 ' $4039 ' 141.18 r 141.54 sae» 4.5% 2.4% 03% .06% . 4 7% ' 01% aos 02% 0" 03% 07% 09% 09% Terre 8 184neRearm 7 14.915 ' $1.145 ' $1293 7 51.576 ' 11.189 r 15351 P $1215 ' $1376 " $1.655 ' $1243 ' MOO ' 15.759 35989 vo Y%C!‘,. 17.6% 14% 33% 56% 39% 4.1% 91% 6.5% 5.0% 47% 55% 49% 4.6% ~Remo* r $1367 $455 $531 ORS $502 P. 73,118 $504 $551 4612 $512 ' $2.310 $2.430 new 0349 Renructflertel Day 18.4 162 16.4 118 17.0 18.7 17.5 189 17.4 17.8 17.3 17.6 17.9 YGY % CN, f6.4% 3.6% 39% 105% 75% 66% 10.4% 9.4% 8.7% 80% 9.2% 1.5% 76% at % 6.• row 6 throot Photo» 328% 329% 411% 396% 473% 497% 42.5% 47.7% 417% 436% 42 f% 47.4% 47.7% Total MITIIPM NM $1,181 $1.521 12204 $1.990 $7319 $1,719 OM $2,334 $1.791 $7414 $3,147 $9,541 Y-64% Cro 766% 3.4% 35% 69% 50% 4.5% 74% 7.3% 62% 57% 66% 51% 4.3% 4.548931%415128 7 461,534 434164 7 595181 7 554,919 7 455.513 7 487122 7 462/98 7 534.175 7 5711.752 7 473514 ' 529837 IP 525,349 537.716 YGY % Ov 22.2% 13% 11% 56% 41% 4.1% (6% 5.7% 4.1% 40% 45% 13% 2.2% NM WM% 71.0% 5(07% 703% 73.4% 703% ' 71.1% 70.2% 765% 737% 767% 71.6% 72.1% 725% 144nta11304 10163 4,214 853 1,037 1.040 1.053 1953 824 957 988 1669 3.759 3.515 3.518 v-o.Y % 6,0 4.1% -7.7% 45% .87% .45% 42% .34% 6.0% 3.0% .59% .4C -4.0% 0.0% Tura& Iteese Re"e pee Day 7 $7141 $71.03 $81.90 115.32 168.38 7 $76115 174.18 $8713 $91.29 $73.15 ' 981.58 $8524 18942 v<,../ % C,9 09% 36% 89% 92% 71% 73% 4.4% 74% 7.0% 7.0% 64% 50% 3.0% MIN; 184.24114.104 ' $372 " $51 ' 482 7 $89 7 $72 7 6384 7 $51 $84 teo $73 ' $3013 1310 $325 v-:•Y% N .E4% o." 4.4% 02% 23% 06% 09% 17% 1.725 16% 25% 0.5% 5.6% 0144 Revery> ' $72 $15 »0 $20 $13 ' tea $14 $19 $19 $12 ' 164 151 $51 0349 Remeructflertel Day 17.1 18.1 19.4 19.5 12.4 17.9 182 114 13.3 114 17.0 17.0 17.0 Y-66 % 6'9 32% 36% 3.2% .09% -715% -54% 40.0% -50% -5.0% 406 -61% 00% 0.0% as %el 7275f & 1.1%.gt»Pdmo» 730'. :" r 737% 726% 151% 223% 77.7% 22.1% 713% 169% 706% 19.6% 18.9% Total Rellelle $374 111 $112 $191 SU $372 176 $192 1119 199 $372 UM $367 44, 4% C.9 -2.0% 00% -23% .05% 4.3% 0.4% 0.4% 06% 01% -02% 4.7% Mane R9412148 26.724 28.632 25,15 23.811 23386 24.992 27.9)3 - 20113 . 22,199 ' 21$42 gem 21,554 21,322 40.5% C.47. 14% 6,0% 4.6% 45.1% 441% .78% 417% .6.1% .6,0% 40% .81% 4.0% 4.1% R961Mallon 431% 352% 442% 47.9% 489% 17 439% 304% 445% 4114% 414% 455% 46.0% 463% Source: Company Dings. JP. Morgan estimates. 13 EFTA00295412 Kevin Milota North America Equity Research 08 May 2014 J.P.Morgan Figure 12: CAR Balance Sheet & Key Balance Sheet Statistics/Drivers in millions FIALINCE MEET 2612 1013 2013 3013 4013 2113 1014 .1014E 301E 401E 201E 2615E 2016E Cash 83 Qin *Wan% 4435 39 501 538 693 693 MI 63,5 1037 143 1133 III? 1µB Rcerci4003 0 0 0 0 0 0 0 0 0 0 0 0 0 Reci4(3440 563 591 31 681 119 619 661 740 722 654 661 696 715 Cote* rism4 Was I03 151 151 163 177 IF? IT7 177 yr 177 II? 177 177 Gee cantelzais 405 St 599 575 456 453 465 455 455 456 453 465 455 (491ante 0,4443 1,710 1171 1146 3,110 1,011 ISM 2,124 2210 2,311 3306 2211 2121 2145 PrOplIVard 0,11,Thltt MI 53 569 Vie 570 III 614 616 622 630 661 461 el 721 147(84113bried num tuft 1.39 1202 131 2010 11(0 103 130 IMO MO 1.69) ISM 130 IMO On, inbubte auf tee POICITtOPOO 1.051 1271 1117 1.70) 1.934 1241 133 1284 1.284 tam 124 I 261 1.214 7449141441144144148 mat, woke rthId• irogams 1,111 5/411 5,714 6121 6102 6,132 6,0% 1117 CMS 6,204 1,264 I.414 1.141 Mills o4'1 41014 0407471 Piper on( 3/ 53 139 210 III 116 116 116 116 116 116 116 116 8840. rici 9.274 *162 1239 10135 AM 9512 11617 r 12.104 r MOO r 9211 9214 r 111561 11347 14033491,50143 ', ward oh, 199 237 102 5(8 301 301 391 391 33 301 301 991 301 0.93818419301/C -rt40(1055 782 332 972 362 363 sw 33 933 363 363 363 331 31 NW astint u0nnee* pours ' 1019) 10.634 12782 11233 10.452 ' *452 11.48? 12971 11.430 10.151 ' 10.154 11103 12217 74441443341 15,211 1637 11101 1734 16214 11214 16501 11/311 17215 IOU 11,351 11,333 1103 locculspatatio antotaran31143•44 1.421 1316 1801 1,416 1.479 1.479 1.479 1,09 1,479 1.479 1479 1.479 1,479 301.8m 004 a* C.101.70 57 29 221 III 81 89 311 es 89 83 39 60 te TOW euntr411.11104 1,476 1,671 tan tem toss ;546 1116 r 1.116 1,611 ' 1,931 ;541 • 1,311 1,301 1.4.80-nneer. 2.8111 3316 3:66 123 335 3135 ' 3137 3807 1607 3.(07 3017 3037 3007 Ctrwmt-ortutlatatte 171 881 875 878 417 647 847 MI 84 7 417 647 847 SI? Teal liataltes tut 81114314 mkt wh1414401am 1117 4777 5112 1,042 1721 n en 4804 6 121 6922 n TobIllaWilles 00103101444,3•40 6 0214 *60 1631 1173$ 1,713 1/13 18716 12111 1013 11,513 1113 11,446 1237 335451105Equy 75? 691 616 OW 771 771 701 850 820 773 r 713 871 1,029 ToU11.141110.11403 15,216 16157 10401 17161 16214 16,2111 17101 19,011 17,715 *MB 11,311 11,333 19,031 CREDIT MATETICS 2112 1011 2013 3013 4013 2113 1014 .2114E 301E 401E 201E 21151 316E /440)1E11011734 640 811 726 774 770 771 791 815 857 444 664 1116 1111 Ideretleaptrimo 731 585 EIS 505 410 42 492 497 500 SP 495 495 5)2 511 kW Cows 061 2105 3317 3.416 3784 3.931 3391 136 3118 306 3.691 303 3096 336 740 Coigne 0414 2239 2.776 2113 2795 2701 2/01 21335 2,116 2199 2713 2/11 2.439 213 MI 11410401 9264 WON 11.34 1113511 1113 9291 MITI 12359 10313 9533 9561 11.443 121307 NkIltethel 4240 10(03 11.84 10148 9.83 BPI 10.910 12251 1037 1147 9.447 11.324 11091 14400 E0351TN" Ini.01E(puse 15 15 a I5 18 16 16 1.6 I7 18 1A 2.0 22 090,444 DM 413704 95 1.1 4.7 44 14 44 4.? 4,5 49 42 41 38 33 Netorpralt 001( Aq.EBITOA 2.7 1,4 40 16 35 35 ' 36 3.5 11 31 3.1 2.5 20 Terpti05130103.04 13 3.3 1k 314 Cob 04 1.01 164 1007114411311144 33301 3195 3561 3157 1,m361NH aw IASI 139 P341304 (BMA 110 124 101 15,1 127 127 136 151 121 10.1 108 II 2 104 394.114413400 44.1200.4 11.0 123 162 141 126 126 134 160 126 107 107 Mt 105 Tc0 Corp I740131(81701 145 185 211 4.7 171 171 182 47 171 150 150 III 1313 NatC31.3114,4113114B1113.4 Ill III 202 44 *I WI IM IlL6 3.7 132 112 III 125 706:3144 5426 $319 $339 f4.79 $5.74 ts. 7% 9% 11% Pats Roan*in rr 4 31.8 314 26.2 306 35 31.3 31.1 26.2 30.1 213 33 21.5 3,34 9014 re Vie 5623 3!I 5516 342 3720 $7.15 9156 56.43 SIM 3721 $7.16 UN 5154 Oricr*Deli(TM C*Bi 793% 928% 84 1% 301% 61.5% 115% 849% 843% 31.0% 37% 627% Ohl% 78.2% Some: Company flings. J.P. Morgan estimates. Figure 13: CAR Cash Flow Statement Sin millions 1112 1013 2013 3013 4013 2013 1014 201E 301E 401E 201E 2015E 2114 Corp34914 EBIMA ' eao 13 I83 391 III 771 117 201 (24 141 ' 684 1.011 1.131 Usa, of Mfr. 034381419044100044 ' -203 46 .57 -59 ' 48 -56 .63 ' -215 .2oe Casti Taus ' 45 .10 -13 40 ' 0 -II -413 -70 ' 40 -90 0034 in Orwirtacir9 3.4 1094 ' 135 -53 4 w 1‘2 ' ice 43 -49 18 CO ' 44 42 834043009/430304 ' -132 -21 -03 ' -154 47 -19 -1? -74 -2(0 ' -203 ' -210 Ora B 99 -106 126 21 29 111 .3 .35 ' al 27 Fir CmRow r 616 51 241 116 • 410 .30 90 31 Ifl 101 . 514 '' 591 108 argustrunc(41444 0 Transom road 398140 -31 44 44 -26 4 00,9400..61 478 08 -0 aw 31 701 Fir/tyro cut tutu. 44thu34431148149 I 15 41 42 10 -It, .7 4 SOX 3,105s -21 ' ar ' aa ' 47 43 .75 ' aco Oriectomeys 41 -181 4 -102 ' 70 -52? -14 ' -19 49 49 -10) ' 1444 iumin la cash lad 03,494041.303 72 47 41 11 114 126 14 4 31 00 114 291 Source: Company flings. JP. Magan mammas. 14 EFTA00295413 North America Equity Research 08 May 2014 J.F!Morgan Avis Budget Group, Inc.: Summary of Financials Income Statement - Annual FY13A FY146 FY156 FY166 Income Statement - Quarterly 1O14A 2014E 3014E 4014E Revenues 7,937 8.498 8.926 9,327 Revenues 1.862A 2.144 2.519 1,953 Cost of goods sold (3.854) (1432) (1,181) (4.304) Cost of goods sold (937)4 (996) (1,123) (976) Gross profit Gross profit SGM (1.020) (1,104) (1,161) (1,227) SG&A (248$ (297) (294) (265) DM (1.942) (2,087) (2,183) (2,264) DM (468)A (541) (589) (459) Operating income 1,121 1.276 1.402 1,532 Operating income 209A 311 532 221 EBITDA 771 884 1018 1,131 EBITDA 117A 201 424 141 Net interest income !(expense) (492) (495) (502) (511) Net interest income/ (expense) (120)A (133) (127) (115) Other income / (expense) 06rer *worm I (expense) Pretax income 110 516 643 738 Pretax income 26A 112 333 45 Income taxes (155) (195) (244) (281) Marne taxes (8$ (43) (127) (17) Net inane GAAP 16 321 398 458 Net income GAAP 18A 69 205 28 Net income - reaming 255 321 398 458 Net income - recurring 18A 69 205 28 Diluted shares outstarcling 115 112 107 103 CiaJted shares outstanding 116A 115 115 115 EPS - GMP 2.20 2.87 3.71 445 EPS- GAAP 0.164 0.61 1.84 0.25 EPS - reaming 2.23 2.87 3.71 4A5 EPS - recuning 0.164 0.60 1.78 021 Balance Sheet and Cash Flow Data FY13A FY146 FY156 FY166 Ratio Analysts FY13A FY14E FY156 FY166 Cash and cash equiralents 809 1.099 1.313 1,604 Sales grcrAth 7.9% 7.1% 5.0% 4.5% Accounts receivable 1,010 1.045 1087 1,116 EBITDA growth (8.2%) 14.7% 15.1% 11.1% Inventories - EPS growth (10.0%) 30.3% 29.6% 19.9% Other current assets 632 632 632 632 Current assets 2,451 2,776 3.032 3,352 Gross margn PP&E 10,196 9,945 11.663 12,068 EBIT margin (14.8%) (14.1%) (13.1%) (12.2%) Total assets 16,284 16,358 18.333 19,058 EBITDA margin 9.7% 10.4% 11.1% 121% Tax rate 37.8% 37.9% 38.0% 38.0% Total debt 10,731 11,483 12453 13,148 Net margin 32% 3.8% 4.5% 4.9% Total liabitbes 15,513 15,585 17.462 18,029 Shareholders equity 771 773 871 1,029 Net debt I EBITDA 1286.9% 1171.3% 1133.7% 10212% Net debt l capital(book) 92.8% 93.1% 93.0% 91.8% Net income (noting charges) 771 884 1.018 1,131 DM 1,912 2487 2.163 Return on assets (ROA) 1.6% 2.0% 2.3% 2.4% Change in working capital 109 (86) (42) (29) Return on equity (ROE) 33.4% 41.5% 48.5% 482% Other Return cn invested capital (ROC) (11.5%) (111%) (10.1%) (5.7%) Cash flow from operations 2,822 2,885 3,159 1,101 Capex (154) (200) (200) (210) Free cash flow 3,201 3,229 3524 1,177 Cash flow from investing actMtes (133) (112) (173) (212) Cash flow from financing activities (196) (106) (300) (360) Dividends Source: Company meats and J.P. Mogan estimates. Note: Sin mauls (except penshare data).Fiscal year ends Dec 15 EFTA00295414 North America Equity Research Kevin Milota 08 May 20Id J.PMorgan Analyst Certification: The research analyst(s) denoted by an "AC" on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an "AC' on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that (I ) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures • Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Avis Budget Group, Inc.. • Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Avis Budget Group, Inc.. • Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Avis Budget Group, Inc.. • Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Avis Budget Group, Inc.. • Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Avis Budget Group. Inc.. • Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Avis Budget Group, Inc.. • Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Avis Budget Group, Inc.. Company-Specific Disclosures: Important disclosures, including price charts. are available for compendium reports and all J.P. Morgan- covered companies by visiting https://jpmm.comfresearcWdisclosures, calling or e-mailing with your request. J.P. Morgan's Strategy, Technical, andQuantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call or e-mail Avis Budget Group. Inc. (CAR, CAR US) Price Chart 100 — OW $53 80 OW MS Date Rating Share Price Price Target 01V S NR OW $36 (5) (9) 12-Apr-10 OW 14.74 20.00 tit 28-Jul-10 NR 09-Oct-13 OW 11.08 28.21 36.00 10-Dec-13 OW 36.98 45.00 20 20-Feb-14 OW 43.61 53.00 0 I o t I I API Oct Apt Oct Apt 06 08 09 II 12 16 acute: Bloornbpg and JP. Morgan. price data adjusted Pc stock spots and dhiclonds. Bonk M *mgage Ad 111 2010. Ocl 09. 2013. The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW Overweight, N- Neutral, UW Underweight, NR - Not Rated t6 EFTA00295415 Kevin Milota North America Equity Research J.P.Morgan 1= 08 May 2014 Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight (Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral (Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight (Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock's expected total return is compared to the expected total return of a benchmark country market index, not to those analysts' coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst's coverage universe can be found on J.P. Morgan's research website, www.kmorganniarkets.com. Coverage Universe: Milota, Kevin: Avis Budget Group, Inc. (CAR), Carnival Corporation (CCL), Harley-Davidson (HOG), Hertz Global Holdings, Inc. (HTZ), Norwegian Cruise Line (NCLH), Royal Caribbean Cruises (RCL), Ryman Hospitality Properties (RHP) J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 44% 44% 11% IB clients* 58% 49% 40% JPMS Equity Research Coverage 45% 48% 7% IB clients° 78% 67% 60% *Percentage of investment banking clients in each rating category. For purposes only ofFINRAJNYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation arc not included in the table above. Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent compan -s cific research re rt at htt Jhvtvw. mo markets.com, contact the primary analyst or your J.P. Morgan representative, or email Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries. All research reports made available to clients arc simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, c-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options. please contact your J.P. Morgan Representative or visit the OCC's websitc at hupgAvww.optionsclearing.comtpublicationstriskshiskstoc.ndf Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank. N.A. is a member ofFDIC. U.K.: JPMorgan Chase N.A.. London Branch. is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority arc available front J.P. Morgan on request. J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London. El4 SIP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ32 I ) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong ander.; J.P. Morgan Broking (Hong Kong) Limited (CE number AAB027) is regulated by the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch. is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 01I/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-typc) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower. Ott C.S.T. Road, Kaline, Szintacruz East, Mumbai -400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 23067523I/INF 23067523 I4NE 230675231) and Bombay Stock Exchange Limited (SEBI 17 EFTA00295416 Kevin Milota North America Equity Research 08 May 20 Id J.P.Morgan Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. For non local research reports. this material is not distributed in India by J.P. Morgan India Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission and its registered address is 3rd Floor. 20 North Sathom Road, Silom. Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valorcs Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa dc Boise, S.A. de C.V., l.P. Morgan (irupo Financicro is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS) (ma (P) 199/03/2014 and Co. Reg. No.: 199405335R) which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. This material is provided in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289. Recipients of this document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Ballad and a holder ofCapital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent. arranging. advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor. Al-Faisaliyah Tower. King Fahad Road. P.O. Box 51907, Riyadh 11553. Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3. Level 7, PO Box 506551, Dubai, UAE. Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38,47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who arc not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client' has the meaning given in section 76ICi of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities pk, Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which arc regulated by the Bundesanstalt fiir Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be baud on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.h1c. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading. JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co.. Ltd.. and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co.. Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association. The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of.I.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not. and under no circumstances is to be construed as. a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This rc port has been issued to ersons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS andkir its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change 18 EFTA00295417 Kevin Milota North America Equity Research 08 May 2014 J.P.Morgan without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and arc not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companiesrmdustries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures' last revised April 5. 2014. Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. 19 EFTA00295418