Shares of Avis Budget Group (NASDAQ:CAR), a vehicle rental company, jumped over 12% during early Thursday trading, thanks in part to a upgrade from Morgan Stanley.
Morgan Stanley analyst Adam Jonas upgraded Avis from underweight to equal weight and bumped the price target from $7 to $15. Jonas believes the company's $500 million secured bond issuance was hugely important, and also pointed out that management successfully achieved over $2 billion in run-rate annualized cost savings. Arguably the most important thing Jonas noted was about used cars' residual values: "Used car prices are also improving vs. our previous concerns. Risks remain but our $15 target justifies the change of view."
You can see a clear difference between Avis and its rival Hertz Global Holdings (NYSE:HTZ) over the past month. That's because, if you haven't kept up on developments, Hertz is trudging toward an increasingly likely bankruptcy. The primary issue for Hertz was that it financed its fleet of vehicles, and the deal with its lenders was that if the value of the asset-backed vehicle debt dropped, due to lower used-car prices, it would have to make up the difference in cash payments. Hertz failed to make such a payment in April, and the company was given until tomorrow to develop a strategy that reflects the current dire reality of COVID-19 and its negative effects on travel and transportation.
In the near term, a potential Hertz bankruptcy could result in a flood of used vehicles to auctions in an attempt by lenders to get some value back. Depending on how much of the fleet sells and how quickly, it could send used-car prices down even further, which isn't great news for Avis. However, a Hertz bankruptcy would almost certainly lead to Avis market share gains once travel and transportation rebound. What happens to Hertz is up in the air, but Morgan Stanley's upgrade confirms that Avis is far better positioned to weather the COVID-19 pandemic, and that's reflected in today's stock price gain and the difference between the rivals over the past month.