Can Avis Budget stock continue to improve?

It’s been a really tough year for one of the leading car rental companies. Avis Budget Group (NASDAQ: Automotive).

The car rental company, the second-largest in the U.S. after Enterprise, was one of the biggest gainers Tuesday, with its stock soaring about 6% to about $114 per share. However, Avis stock has recovered only a portion of the losses incurred since the company reported fourth-quarter earnings on February 12th. The next day, the stock plummeted from $168 to $130 per share, a decline of approximately 22%. It continued to fall over the next few days, finally reaching around $100 per share.

In just 10 days, Avis Budget stock fell 40%. Since then it has slowly risen from the low until Tuesday, its best day in months. Let’s take a look at what sparked this move and determine whether Avis Budget can maintain its momentum.

Difficult used car sales market triggers sales

Before we look at the catalyst for Tuesday’s move, let’s go back a month and look at what sparked the selloff. Avis Budget actually reported decent quarterly results, beating revenue estimates while also coming in slightly below revenue estimates. Revenue for the quarter was flat at $2.7 billion, but net income was down 39% year-over-year to $260 million, or $7.10 per share.

The concerns among investors have more to do with Avis’ decision to sell used cars at steep discounts. The company sold record numbers of vehicles in the fourth quarter, earning $50 million from those vehicles, but total sales were 60% lower than the previous four quarters.

Profits on sales were too low, partly due to interest expenses. This is because interest expense increased 70% to $106 per vehicle in the fourth quarter of 2022 compared to $62 per vehicle in the fourth quarter of 2022. Additionally, total depreciation per vehicle increased from $300 to $306 per vehicle, which was higher than expected. These factors were a big part of Avis’ profits, but as President and CEO Joseph Ferraro explained on the company’s fourth-quarter earnings call, selling cars was a strategic decision.

“This is partly in response to expectations of a normalization of the used car market and we wanted to profit from older model vehicles while the opportunity still remains,” Ferraro said.

Avis Budget did not provide an outlook for the current financial year, but said it had not been well-received by investors. Rental demand in the first quarter is expected to increase by mid-single digits compared to the first quarter of 2023, but total depreciation per vehicle sold will be much higher this quarter, at $325 per vehicle.

“(W)e believe it is prudent for our operations and healthy for the entire industry to retire vehicles despite conditions in the used vehicle market,” Chief Financial Officer Izilda Martins said on the earnings call. Supply of vehicles with low demand. “We would rather have an incremental vehicle shortage than have unused vehicles sitting in the parking lot. “We will continue to see this implemented as we reduce our fleet in the first and early part of the second quarter to keep our vehicles in line with demand throughout 2024.”

Why Avis Budget stock price is rising

A few things have happened over the past few days that could push Avis Budget stock higher. One catalyst could be a major reorganization of rival Hertz Global Holdings (NASDAQ:HTZ). CEO Stephen Scherr is leaving the company after nearly two years with the company. Scherr invested heavily in electric vehicles when he joined Hertz. However, big investments in EVs were not successful because customers did not want the hassle of charging their EVs while on vacation or business trips. Last January, the company sold a third of its EV vehicles at a discount.

Effective April 1, Scherr will be replaced by Gil West, former chief operating officer of Delta Airlines (NYSE:DAL) and head of General Motors’ (NYSE:GM) cruise division. Competitor turmoil may have given Avis Budget a boost.

But the bigger catalyst was Bank of America’s bullish report on Avis Budget stock. BofA began coverage of the stock on Tuesday, setting a price target of $170 and giving the stock a Buy rating. This is an increase of almost 50% from the current stock price.

BofA analysts noted that Avis Budget’s revenue has stabilized. They also expect profits to recover faster than competitors due to improved efficiency, stable prices, more consistent performance, and a favorable outlook for travel spending.

BofA also cited a dirt-cheap valuation for Avis Budget, as its price-to-earnings ratio is 5 and its earnings are only 2.6x. BofA’s recommendation lent credence to the notion that the February selloff was overblown, but in fact it was not. This makes this stock very attractive from a valuation perspective. The first quarter may be a bit rocky, but Avis Budget’s near-term outlook looks to be much better as interest rates fall and travel spending rises. Therefore, considering that the stock price is at its lowest level, it is difficult to ignore.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.