Avis Budget Group (CAR): Buy, Sell, or Hold Post Q3 Earnings?

Over the last six months, Avis Budget Group’s shares have sunk to $130.42, producing a disappointing 11.3% loss - a stark contrast to the S&P 500’s 12.7% gain. This might have investors contemplating their next move.

Is now the time to buy Avis Budget Group, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Is Avis Budget Group Not Exciting?

Despite the more favorable entry price, we're cautious about Avis Budget Group. Here are three reasons there are better opportunities than CAR and a stock we'd rather own.

1. Inability to Grow Available rental days - Car rental Points to Weak 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.

Over the last two years, Avis Budget Group failed to grow its available rental days - car rental, which came in at 68.65 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Avis Budget Group might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Avis Budget Group’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

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 $972.3 million of cash over the last year, and its $6.06 billion of debt exceeds the $564 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 isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 15.9× forward P/E (or $130.42 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.

Stocks We Would Buy Instead of Avis Budget Group

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