Avis (NASDAQ: CAR) is Still an Attractive Risk-Reward

Avis Budget Group NASDAQ: CAR looks primed for another leg-up after basing for nearly three months. The rental car company’s shares are trading just below the breakout point, with shares spending the past couple of weeks in a tight range.

Hertz Global Holdings NYSE: HTZ, one of Avis’ top competitors, was clobbered by the pandemic and forced to file for bankruptcy.

Even though Avis is losing a lot of money in 2020, it is well-positioned to weather the storm. And if the company is able to return to pre-pandemic profitability levels, it will be an excellent value.

In early July, I felt the risk-reward was good on Avis. Even with a higher share price, that hasn’t changed.

Q2 Was Filled with Struggles… But There are Reasons for Optimism

Avis reported its Q2 2020 earnings about a month ago. Here are a few of the highlights:

• Sales dipped 67% yoy to $760 million, compared to analyst estimates of $719 million.
• Adjusted for one-time items, Avis lost $388 million, or $5.60 a share. Analysts had expected an adjusted loss of $5.68 a share. In Q2 2019, Avis’ adjusted earnings were 79 cents a share.
• Avis burned around $580 million in cash during the quarter, lower than its original estimates of a $900 million cash burn.

The numbers were obviously very weak compared to the year-ago period, but that was to be expected.

The good news is that Avis beat expectations and when we dig into the data, business looks better than the surface numbers would indicate:

• Revenue comps improved as the quarter progressed – down 78% in April, but down 59% in June.
• Avis noted that, “We reduced our cost base to match current revenue trends, removing more than $2.5 billion of annualized costs compared to the initial $400 million we announced in late March. Second quarter expenses were 47% lower than prior year, as we removed over $1 billion of costs.”
• Avis CEO Joe Ferraro said, “Coupled with the significant reduction of vehicles as we right size our fleet to current demand, we anticipate both positive cash flow and Adjusted EBITDA for the remainder of 2020.”

That last point is key.

Used Car Prices Have Been Higher Than Expected

Back in early July, Morgan Stanley Analyst Adam Jonas boosted his Avis price target largely because he expected used car prices to hold up better than originally expected.

Avis has been downsizing its fleet since the onset of pandemic to raise cash and adjust to decreased demand. In its Q2 earnings release, Avis noted, “We disposed of more than 100,000 vehicles and canceled over 185,000 incoming vehicle orders around the world in the quarter, with June ending fleet down 26% year-over-year. We averaged a significant gain on disposal per unit for the quarter.”

In July, the average listing price of used vehicles was $21,558, up $708 from June. Used-car prices have been high for a few reasons, including:

• Low interest rates.
• Automakers being forced to shut down, leading to a decrease in new vehicle inventory.
• Some people are currently scared to use public transport.

Avis Shares Are Still Worth It

Back in early July, I thought that Avis was a good value at just under $26 a share. At a little over $34 a share, I think Avis is still a good value.

The company and industry data we’ve seen since then only strengthen my belief that Avis will survive the pandemic – and thrive once it ends.

So even though shares are around 30% higher now, they are still worth it.

Look for a Breakout

If Avis decisively breaks above $35 a share, look to get in.

There is an argument to consider post-pandemic resistance around $36, from early June. But shares never even closed above $35, only hitting $36 on an intra-day basis before quickly coming back to the low $30s. Therefore, I wouldn’t be too concerned about overhead supply if Avis breaks above $35.

The 50-day moving average recently crossed over the 200-day moving average, which provides a nice technical tailwind for Avis.

While a breakout would likely take shares into overbought territory on the RSI, I wouldn’t be too concerned as shares are not extended on an intermediate-term basis.

The Final Word

It’s tough to buy a company that is losing hundreds of millions of dollars, and recently had a competitor file for bankruptcy.

But Avis is unlikely to meet the same fate as Hertz. If you buy Avis, there will be short-term pain… But there will likely be a lot of long-term gain.