Shares of Avis Budget Group (CAR 3.40%) soared 29% at the open on Thursday morning after receiving an upgrade from Morgan Stanley. Car sales are holding up better than feared during the pandemic, according to the analyst, and that is good news both for Avis Budget and its bankrupt rival Hertz Global Holdings (HTZG.Q).
Avis Budget shares gave back some of those gains after the open, but were still up 19% as of 10:30 a.m. EDT.
While the business of renting cars is what comes to mind first when thinking of companies like Avis Budget or Hertz, the companies actually generate a substantial portion of their revenue from selling their used vehicles on the open market. The rental market is under pressure due to the COVID-19 pandemic, which has reduced travel demand and caused airlines to cut their schedules, and investors had assumed auto sales would be impacted by the pandemic as well.
But in a research note Thursday, Morgan Stanley's Adam Jonas said that new and used car sales have been more resilient than analysts had expected, driven by a combination of stimulus packages, credit availability, and continued consumer demand for automobiles.
Jonas now estimates used car prices will drop 5% in 2020, much better than his prior forecast for a 10% decline, and believes used car prices can rise slightly in 2021. As a result he has upgraded Avis Budget to "overweight" from "equal weight" and raised his price target on the company's shares to $37 from $25.
The big news here is a stronger used car market would lessen the odds that Avis Budget ends up joining Hertz in bankruptcy. Investors initially rallied into Hertz shares as well, sending them up more than 7% at the open, though the stock had given up those gains an hour into trading.
The rental car business will struggle until travel returns, but stronger-than-feared used car sales would certainly be a plus. It's too late to save Hertz, which despite the continued interest in the shares will likely cancel out its equity as part of the bankruptcy process, but the case for buying and holding Avis Budget through the downturn is much easier to make if the value of its fleet does not collapse.