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Why Avis Budget Group Stock Jumped 56% in the First Half of the Year

By Jeremy Bowman - Jul 12, 2019 at 2:19PM

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Shares of the car-rental company rose on improving fundamentals and a favorable market environment.

What happened

Times have been tough for rental-car companies in recent years. The traditionally challenging business has been hammered by the rise of ridesharing services like Uber and Lyft, and as a result, car rental stocks Hertz and Avis Budget Group (CAR -10.31%) have tumbled over the last five years. 

However, more recently Avis seems to be finding its footing: The stock has surged 56% this year, according to data from S&P Global Market Intelligence, on a pair of better-than-expected earnings reports, an improving cost structure, a bullish stock market, and analyst upgrades as the business appears to be stabilizing.

A man checking the Avis car app with a blurry car in the background.

Image source: Avis.

As you can see from the chart below, all of the stock's gains came in the first two months of the year, with the biggest surge coming after the company reported fourth-quarter earnings in February. 

CAR Chart

CAR data by YCharts.

So what

Shares of Avis Budget Group, which also owns Zipcar, rose alongside the market recovery to start the year, as stocks broadly rose amid dovish signals from the Federal Reserve after tumbling in December. 

The stock began to climb again on Feb. 11, gaining 7.4% that day after Goldman Sachs gave the it a "double upgrade," lifting its rating from sell to buy. Analyst David Tamberrino said the valuation looks attractive and the company would start "realizing the benefits of cost savings actions." 

The following week, shares surged again, up 17% after the company's fourth-quarter earnings report came out. Posting its ninth consecutive year of revenue growth, Avis said revenue in the quarter ticked up 1.5% to $2.05 billion, in line with estimates, and cost-cutting measures helped lift adjusted earnings per share 18% to $0.53, well ahead of expectations at $0.37. 

For the year ahead, Avis called for revenue of $9.2 billion to $9.5 billion, which would mark growth of 0.8% to 4.1%. On the bottom line, it sees adjusted earnings per share of between $3.35 and $4.20, which compares to $3.65 in 2018.

Following that spike, the stock traded near the $35 mark until the first-quarter earnings report came out on May 1. The stock rose 3% on the news even as revenue fell 2% to $1.9 billion due to a 3% headwind from currency exchange. Avis posted an adjusted loss of $0.78, worse than a loss of $0.74 a year ago but better than estimates at $1.01. Management also reaffirmed its guidance for the year. 

However, the stock slipped in the days after the earnings report as trade tensions between in the U.S. and China flared again. As a rental car company, Avis is sensitive to the global macroeconomic business and travel climate.  

At the end of May, the company announced that CEO Larry De Shon would step down after four years running the company. Avis formed a committee to find a successor, and De Shon plans to stay with the company through the end of the year to ensure a smooth transition. 

In June, the stock bounced back as trade tensions eased and the Fed signaled a dovish stance.

Now what

Avis stock has moved up a couple points alongside the broader market in July, and should continue to be sensitive to macroeconomic news. Still, shares seem to be fully valued now, trading at a P/E near 10 based on this year's projected earnings, and the company continues to face challenges from ridesharing and other new technologies. Even after the gains year to date, the stock is still down 40% over the last five years.

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Stocks Mentioned

Avis Budget Group, Inc. Stock Quote
Avis Budget Group, Inc.
CAR
$190.88 (-10.31%) $-21.94
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$309.98 (-0.95%) $-2.99
Hertz Global Holdings, Inc. Stock Quote
Hertz Global Holdings, Inc.
HTZG.Q
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
$22.88 (-5.47%) $-1.32
Lyft, Inc. Stock Quote
Lyft, Inc.
LYFT
$18.95 (-3.91%) $0.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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