EFTA00295400.pdf

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% S