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Are Avis Budget Shares About to Stall?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Avis Budget Group (NASDAQ: CAR  ) sank as low as 4% this morning after Goldman Sachs downgraded the car rental company from buy to neutral.

So what: Along with the downgrade, analyst Afua Ahwoi lowered his price target on the stock to $30 per share (from $33), representing only about 7% worth of upside to yesterday's close. Ahwoi believes that the hot stock's upside is now limited, especially when he considers the recent trend of declining residuals and fleet costs, suggesting that investors aren't paying enough attention to the risks involved.

Now what: Goldman now expects Avis' 2014 EBITDA to come in at $845.2 million, down from its prior view of $885.6 million and about 4.5% below the Wall Street consensus. "Following the significant outperformance, we now see more limited upside at Avis," wrote Ahwoi. "Additionally, our new analysis on the sensitivity between declining residuals and fleet costs suggests our prior 2014 implied monthly fleet costs growth of 1.3% was too low." Given that the stock is still up about 85% from its 52-week lows and trading at a P/E of 20, the downside risk suggested by Goldman is certainly worth paying attention to. 

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Related Tickers

9/30/2016 4:00 PM
CAR $34.21 Up +0.48 +1.42%
Avis Budget Group CAPS Rating: **