What happened
Shares of Avis Budget Group (CAR 0.76%), a well-known vehicle rental company, are up 13% Wednesday as investors continue to jump on board after rival Hertz (HTZG.Q) filed for bankruptcy protection, possibly causing a short squeeze.
So what
From the beginning of the COVID-19 pandemic, two things were very clear when it came to Avis and Hertz: that both businesses would be decimated in the near term along with the broader auto industry, and that Avis appeared better positioned to weather the storm. That's been accurately reflected in the stock prices, especially after Hertz filed for bankruptcy protection.
Investors had a right to be pessimistic, as both companies derive much of their business from airport travel, which ground to a near standstill over the past two months. Avis anticipated that April and May would both show revenue declines around 80%. Part of the reason for investors' optimism toward Avis is that Hertz will likely be liquidating parts of its business, which should enable Avis to increase its market share in the near term. While what happens with Hertz is largely up in the air currently, Avis should benefit. Further, the broader economy is opening up a bit faster than expected, which is hugely positive news for Avis. Also worth noting is a report from APD that said U.S. employers lost roughly 2.8 million private payroll jobs in May, and while that's a horrendous figure compared to normal reports, it's far better than the Wall Street's expectations for private sector job losses of 9 million.
Image source: Getty Images.
Now what
Avis' jump today could simply be shorts covering their position as a gradual economic recovery becomes more likely -- one that enables the vehicle rental company to survive the COVID-19 impacts. In addition to a possible short squeeze pushing shares higher, as job losses slowly stabilize and the economy gradually reopens, the current situation opens the door for Avis' business to improve. Avis could take a bigger chunk of the industry as Hertz potentially liquidates some assets and likely downsizes its operations to satisfy some lenders during its bankruptcy process.
