It has been a crazy yr thus far for considered one of the leading rental-car firms, Avis Budget Group (NASDAQ:CAR).
The nation’s second-largest car-rental company behind Enterprise was considered one of the highest gainers on Tuesday, as its stock price surged some 6% to roughly $114 per share. Nevertheless, Avis shares only clawed back among the losses incurred following the discharge of the fourth-quarter earnings results on Feb. 12. The stock plummeted some 22% the following day, tumbling from $168 per share to $130 per share, after which it kept dropping in the times that followed, finally reaching about $100 per share.
Within the span of just 10 days, Avis Budget stock had fallen 40%. Since then, it has slowly moved up off those lows until Tuesday, its best day in months. Let’s see what prompted the move and check out to find out if Avis Budget sustain its momentum.
Tough marketplace for used-vehicle sales sparks sell-off
Before we get into the catalysts for Tuesday’s move, let’s return a month to see what spurred the sell-off. Avis Budget actually reported an honest quarter, beating earnings estimates while falling only barely wanting revenue projections. Revenue was essentially flat within the quarter at $2.7 billion, while net income was down 39% yr over yr to $260 million, or $7.10 per share.
The priority amongst investors had more to do with Avis’ decision to unload its fleet of used cars at an enormous discount. The corporate had a record number of car sales for a fourth quarter, gaining $50 million on the sale of those vehicles, but that sales total was 60% lower than within the previous fourth quarter.
Partly, the sales gain was so low resulting from rates of interest, as interest costs were up 70% to $106 per vehicle within the fourth quarter, in comparison with $62 per vehicle within the fourth quarter of 2022. Moreover, the gross depreciation per vehicle was higher than expected at $306 per automotive, up from the anticipated $300. These aspects took a piece out of Avis’ profits, but selling the cars was a strategic decision, as President and CEO Joseph Ferraro explained on the Q4 earnings call.
“This was driven partly by our forecast of a normalizing used-car market, and we desired to harvest gains on older model yr fleets while the chance was still there,” Ferraro said.
While Avis Budget didn’t provide an outlook for this fiscal yr, the little it did say didn’t sit well with investors. While rental demand is predicted to grow within the mid-single digits in Q1 in comparison with Q1 of 2023, the gross depreciation per vehicle sold will probably be even higher at $325 per vehicle this quarter.
“[W]e imagine that it’s prudent for our operations and healthy for the general industry to exit vehicles despite the used-car-market conditions,” Chief Financial Officer Izilda Martins said on the earnings call, adding that it is necessary to match vehicle supply to slightly below demand. “We prefer to expire of the incremental vehicle than have an un-utilized vehicle on the lot. You’ll proceed to see us to place this into practice as we de-fleet throughout the primary quarter and the sooner a part of the second quarter to take care of fleet to under demand throughout 2024.”
Why Avis Budget stock is rising
A few things happened previously few days which will have lifted Avis Budget stock. One catalyst could also be a significant shake-up at competitor Hertz Global Holdings (NASDAQ:HTZ), where CEO Stephen Scherr is leaving after roughly two years at the corporate. Scherr had made an enormous investment in electric vehicles when he got here to Hertz. Nevertheless, that big bet on EVs didn’t pan out, as customers didn’t want the effort of charging EVs while on vacation or business. This past January, the corporate sold one-third of its EV fleet at discount prices.
Effective April 1, Scherr will probably be replaced by Gil West, the previous chief operating officer of Delta Airlines (NYSE:DAL) and the pinnacle of General Motors’ (NYSE:GM) Cruise unit. The turmoil at its rival can have provided Avis Budget with a lift.
Nevertheless, the larger catalyst was a bullish report on Avis Budget stock from Bank of America. BofA initiated coverage of the stock on Tuesday, setting a $170 price goal and giving it a Buy rating. That will be up almost 50% from its current share price.
BofA analysts noted that Avis Budget’s earnings have stabilized. In addition they anticipate that its earnings will get better faster than those of its peers resulting from its improved efficiency, stable pricing, more consistent performance, and a good outlook for travel spending, amongst other aspects.
BofA also cited Avis Budget’s dirt-cheap valuation, because it’s trading at just 2.6 times earnings with a forward price-to-earnings ratio of 5. The BofA suggestion lends credence to the notion that the February sell-off was overblown, but it surely did make this stock extremely attractive from a valuation standpoint. While Q1 may very well be just a little rocky, the near term looks significantly better for Avis Budget as we head toward lower rates of interest and a rise in travel spending. Thus, the stock is difficult to disregard given its rock-bottom valuation.
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