Avis Budget Group trades at $75.35 per share and has stayed right on track with the overall market, losing 6.1% over the last six months while the S&P 500 is down 9%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Avis Budget Group, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the more favorable entry price, we don't have much confidence in Avis Budget Group. Here are three reasons why there are better opportunities than CAR and a stock we'd rather own.
Why Do We Think Avis Budget Group Will Underperform?
The parent company of brands such as Zipcar and Budget Truck Rental, Avis (NASDAQ: CAR) is a provider of car rental and mobility solutions.
1. Weak Growth in Available rental days - Car rental Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Avis Budget Group, our preferred volume metric is available rental days - car rental). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Avis Budget Group’s available rental days - car rental came in at 61.82 million in the latest quarter, and over the last two years, averaged 3.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Avis Budget Group, its EPS declined by 73.4% annually over the last five years while its revenue grew by 5.1%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Avis Budget Group burned through $1.20 billion of cash over the last year, and its $5.39 billion of debt exceeds the $534 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Avis Budget Group’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Avis Budget Group until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Avis Budget Group falls short of our quality standards. After the recent drawdown, the stock trades at 7.2× forward price-to-earnings (or $75.35 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Like More Than Avis Budget Group
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