Avis Budget Group (NASDAQ: CAR) Surges on an Upgrade: Can It Survive the Pandemic?

Avis Budget Group NASDAQ: CAR shares surged as much as 29% on Thursday before closing up 15% after Morgan Stanley gave it an upgrade. Analyst Adam Jonas raised his price target from $25 a share to $37.

Avis shares plummeted from over $50 a share in mid-February to a low of $6.35 in mid-March on fears that the pandemic would crush the rental car company. While its competitor Hertz Global Holdings NYSE: HTZ ended up filing for bankruptcy, Avis shares have managed to turn it around.

CAR shares quickly stabilized after making the March lows and trended all the way past $30 a share before settling in the $20s to close the month of June.

There’s a lot to unpack when evaluating Avis – a company facing plenty of headwinds due to the pandemic.

Let’s start by talking about the upgrade.

Used Car Prices

While Avis’ primary business is car rentals, there’s more to it.

Avis manages a massive fleet of rental cars, which means it is also in the business of buying and selling cars.

The expectation of weak used car sales was partially responsible for Avis’ plunge in February and March, but Jonas now believes the pandemic won’t impact used car prices as much as previously anticipated. He thinks prices will drop 5% in 2020 after his previous forecast called for a 10% decrease. Furthermore, Jonas sees prices rising slightly in 2021.

Used car sales are currently even more important to Avis’ business than during normal times. The company is downsizing its fleet because it needs liquidity and doesn’t see demand approaching pre-pandemic levels anytime in 2020.

On the Q1 2020 earnings call, CEO Joe Ferraro said, “we anticipate fleet to be reduced by 20% in June compared to prior year.”

Downsizing its fleet is one of a few things that Avis is doing to build enough of a cash position to weather the coronavirus-induced storm.

Increasing Liquidity

In addition to selling some of its vehicles, Avis also let go of some employees and cut all nonessential spending. The company hopes to reach close to $500 million in annualized cost savings with these moves.

To further boost liquidity, Avis sold $500 million of senior notes in May. Unfortunately, the debt came with a high 10.5% interest rate. But in a tough business environment, this interest rate will be well worth paying if it helps Avis avoid the same fate as Hertz.

The company believes it has enough liquidity to take it into 2021.

Avis is doing all that it can to cut costs, but how are the company’s overall numbers looking?

2020 Revenue and Earnings

Avis was riding high before the pandemic hit. Through the first two months of Q1 2020, revenue was up 9% yoy with strong operating metrics across the board. Adjusted EBITDA was also up $60 million yoy over these two months.

Business took a turn for the worse late in Q1 and Avis ended the quarter with revenue of $1.8 billion, down $167 million yoy. Adjusted EBITDA was down $87 million for the full quarter and Avis recorded a net loss of $158 million.

During the Q1 earnings call, Avis acknowledged that Q2 would be even worse. Revenue for April was tracking around 80% lower yoy and Avis expected a similar decline in May. While Avis expressed optimism for an increase in demand beginning in June, a second wave of the coronavirus has brought fresh concerns that travel demand will be muted throughout 2020.

Consensus estimates have Avis losing more than $7 a share in 2020.

But assuming that Avis can stay afloat until the pandemic abates, would shares represent good value at current levels?

Valuation

In 2019, Avis had full-year earnings of $3.98 per share. If it can return to those levels, it would be trading at a P/E ratio of less than seven at current levels.

There’s a leap of faith that it will get back to those numbers. This is a company that is taking out high-interest rate debt, cutting personnel, and downsizing its fleet. On top of that, travel is no guarantee to fully recover in 2021.

All that said, Avis looks like a good risk/reward at these levels. Every indication is that the company will survive the pandemic, and 2021 should at least be much better than in 2020. And two years from now, travel should fully recover, allowing Avis to return to pre-pandemic profitability.

With Avis looking like a good value, let’s look at possible entry points.

Technicals

I’ll start by saying you don’t want to get into Avis right now.

Thursday’s action hints at a coming pullback as shares closed near the bottom of the day’s range (up 15%) after reaching highs of up 29%. Another reason for concern is that Avis closed just below the 200-day moving average after moving above it. This combination indicates Avis is facing near-term resistance at $26-29 a share.

You have two possible entry points:

1. A consolidation right around the 200-day moving average followed by a breakout above $29 a share on high volume.
2. A pullback to around $20 a share, which would bring shares to the 50-day moving average and also retest the breakout from a two-month base made between late March and late May.

For now, keep an eye on Avis, and consider getting in when the price action gives you the go-ahead.