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Why Avis Budget Group Popped 11% Tuesday

By Daniel Miller – May 26, 2020 at 11:43AM

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A few developments, and rising broader markets, are driving Avis Budget Group higher Tuesday.

What happened

Shares of Avis Budget Group (CAR 5.68%), one of the nation's largest vehicle rental companies, are jumping 11% higher Tuesday morning after a bear pulled its rating, investors digested a Hertz (HTZG.Q) bankruptcy, and the market cheered a potential vaccine for COVID-19.

So what

Broader markets are rising after data showed U.S. consumer confidence moved higher in May, suggesting the worst of the COVID-19 impacts could be behind us and a gradual economic recovery could be ahead. That's obviously great news for Avis Budget Group, whose business relies largely on consumers traveling.

There were also a number of positive developments regarding the battle against COVID-19. Merck announced a list of efforts it was taking in the fight, including agreements to work on a vaccine and antiviral treatment. Novavax also began human testing of its coronavirus vaccine candidate and could have preliminary data as soon as July.

Rows of vehicles on a dealership lot

Image source: Getty Images.

Around the time Hertz was filing for bankruptcy and many automotive stocks were suffering, Morgan Stanley pulled its bear rating on Avis Budget Group and noted it had taken the right steps to raise liquidity and cut costs to weather the COVID-19 storm. It's also worth noting that one of the primary concerns during COVID-19 was the rapidly falling used car prices, but there has been some recovery in those metrics. Morgan Stanley now has a $15 price target on Avis with an equal-weight rating.

Now what

Avis investors should start paying close attention to how the Hertz bankruptcy will impact its business. In the immediate term, as an essential business, Hertz will remain operating and has about $1 billion in cash to support operations. Major lenders allowed Hertz to fall into bankruptcy because they will likely get most of their money back by selling some Hertz assets, but shareholders could get wiped out. The problem for Avis will be if lenders decide to liquidate a significant chunk of its vehicle fleet, which could put substantial pressure on used-car prices. A lot of things are up in the air currently, but it's clear Avis is better positioned to weather the COVID-19 storm and could benefit from industry consolidation depending on how the Hertz bankruptcy shakes out.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Avis Budget Group, Inc. Stock Quote
Avis Budget Group, Inc.
$151.73 (5.68%) $8.15
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$86.79 (0.17%) $0.15
Hertz Global Holdings, Inc. Stock Quote
Hertz Global Holdings, Inc.
Novavax, Inc. Stock Quote
Novavax, Inc.
$19.08 (2.75%) $0.51

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