Time To Sell Avis Budget Group Stock?

by Trefis Team
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[Updated 05/06/2021] Avis Budget Group Stock Update

At the current price of around $84 per share, we believe Avis Budget Group’s stock (NASDAQ: CAR) is above its near term potential compared to market estimates. Avis budget group, a car rental industry company, saw its stock rise by 257% since the end of 2018 compared to the S&P500 which has increased by 69% in the same period. Revenue increased from 2017 to 2019 but fell drastically in 2020 due to the Covid-19 pandemic. In recently released Q1 2021 earnings the company recorded a revenue fall of 22% y-o-y to $1.37 billion. Net loss increased slightly to $170 million compared to $158 million in the same period of the previous year.

Over the recent years, the company has seen earnings rise while its P/S multiple has also increased. Our dashboard Buy or Sell Avis Budget Group’s Stock has the underlying numbers.

Due to the Covid-19 crisis, Avis Budget Group revenues fell to $5.4 billion in 2020 compared to $9.2 billion in 2019. Further, its net income fell to $-684 million, decreasing its EPS figure to $-9.71 compared to $4.01 in 2019. As per market estimates the company is expected to recover its revenue to above $7 billion in 2021 as restrictions ease as well as the rate of vaccination grows. The earnings are expected to improve to $-1.20 for 2021 and the stock price as per consensus estimates is around $70, down 16% compared to the current market price.

[Updated 06/10/2020] Is Avis Budget Group Safe Despite Hertz’s Bankruptcy?

Avis Budget Group’s stock (NASDAQ: CAR) has declined by 12% since the beginning of the year. The car rental industry is rattled, and Avis Budget is no exception. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders, resulting in minimal travel will continue to take its toll on the car rental industry. With Hertz filing for bankruptcy protection, the mere survival of car rental companies has come into question. While a bankruptcy doesn’t necessarily means a company going out of business, it can also include massive financial restructuring.

Trefis analyzes the potential Impact Of The Covid-19 Recession On Avis Budget Group with a focus on the company’s liquidity reserves and concludes that Avis Budget has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On Avis Budget Group’s Revenues 

  • We estimate if a recession persists through late Q2/early Q3 2020 the demand for Avis’ cars will remain low as people will be averse to travel. As a result, Avis Budget Group’s revenues could decline by about 30% in FY’20, on account of weaker demand, more focus on essentials and thereby a reduction in discretionary spending, and less travel.
  • In addition to that, the company derives nearly 70% of its revenues from the US, which has become the epicenter of the outbreak – recording the largest numbers of Covid-19 cases across the globe.
  • Even with the slow reopening of the economy as the lockdown is beginning to lift, social distancing measures may continue for months, which will impact people renting cars for outings.

Impact On Avis Budget Group’s Cash Flows

  • Avis’ cash flows are likely to plunge in FY2020 due to a steep fall in revenues and reduced profitability.  
  • The company will have to offer car rental at a discount to keep the cash flowing. 
  • Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
  • Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $2.6 billion in 2019 to $1.8 billion in 2020. Also, with expected capital expenditures of $1.8 billion for the year, FCFO-CapEx could be a mere $21 million in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $707 million, which is higher than compared to 2019. 
  • This is with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, Avis Budget Group can weather a recession through Q2 2020 and a 30% decline in revenues by cutting Capex, share repurchases, and suspending dividends. 

While Avis Budget Group stock may have moved, it is helpful to see how its peers stack up. Check out Avis Budget Group Peer Comparisons to see how Avis Budget Group compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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