Vaccine is a Game Changer for Avis (NASDAQ: CAR)

With the stock market constantly setting record highs, it’s easy to forget that there are some industries that have been crushed by the pandemic. The rental car industry is one of them. Hertz NYSE: HTZ filed for Chapter 11. Avis NASDAQ: CAR has been spared from a similar fate, but its numbers have decreased a lot from pre-pandemic levels.

That said, Avis’ numbers have been trending in the right direction over the past six months. A strong used car market has helped the company stay afloat and an imminent vaccine can help Avis return to pre-pandemic levels of profitability sooner rather than later.

Numbers Moving in the Right Direction

The second quarter was abysmal for Avis – revenue was down 67% yoy to $760 million for the full quarter – but comps showed sequential improvement. In Q3, Avis’ sequential improvement continued: revenue was down 50% yoy, 43% yoy, and 37% yoy in July, August, and September respectively. Yes, the September numbers are still bad, but progress is progress.

Avis’ Q3 revenue beat expectations and earnings blew away estimates - $1.13 per share actual vs. $0.15 estimated – sending shares up 4% in after-hours trading. But Avis shares had a curious reaction over the next two trading sessions, dropping more than 16%. Maybe the whisper numbers were much higher, but it’s also possible that investors shrugged off the beat because of the steep hill that Avis still needs to climb.

As you can see, Avis’ drop was short-lived as the Pfizer NYSE: PFE vaccine news was released days later. Shares surged more than 22% in response to the news, and frankly, the move might not have fully taken into account the improvement in Avis’ fortunes.

Vaccine Can Help Avis Recover to Pre-Pandemic Heights

The rental car business is highly correlated with air travel; a lot of the demand for rental cars comes from people that flew in from far-flung destinations. With air travel at a fraction of pre-pandemic levels, Avis’ business has predictably suffered.

But the vaccine promises to change that. It remains to be seen exactly how a vaccine will restore travel –immunization certificates are possible – but the travel industry should be able to find a workable solution by the summer or fall of 2021.

Can Avis Survive Until Then?

It’s all well and good if a widely distributed vaccine comes 6-9 months from now, but we’ve already watched Hertz declare bankruptcy and Avis has piles of debt. Can it last until next summer?

Yes. For two reasons:

1. The company has no “meaningful debt maturities until 2023 and no need to refinance any fleet debt this year.”
2. Avis continues to downsize its fleet because it doesn’t need as many cars to satisfy demand. The strong used car market has helped ensure that Avis gets top dollar on its vehicles – every dollar helps.

Building on that last point, though the fleet has been a major contributor to cost removal efforts, it hasn’t been the only contributor. Avis has committed to “persistently evaluate every line item of expense and find creative ways to work with suppliers and partners to find efficiencies.” The company expects to remove more than $2.5 billion in costs for the full-year 2020. That $2.5 billion figure is actually slightly higher than Avis’ market cap.

Avis Still Offers Value

Avis shares are a bit more expensive than they were back in July, but the overall market is much higher than it was 5+ months ago, and Avis’ prospects are certainly better now.

If Avis recovers to 2019 levels – earnings were $3.98 per share for the full year – it would be trading at less than 9x earnings at current levels. There are no guarantees, but the vaccine makes it very possible that Avis can get back to those levels over the next couple of years.

How Should You Play Avis?

An Avis investment comes with risk: there’s the debt and the uncertainty of how quickly the vaccine will restore travel. The chances of Avis declaring bankruptcy appear low, but debt is going to reduce cash flows for the foreseeable future.

That said, Avis looks like the type of company that will be in great shape a couple of years from now. An investment decision will hinge on whether you have the time horizon to let that play out.