Shares of vehicle-rental incumbent Avis Budget Group (CAR 0.35%) zoomed into the speeding lane on Thursday, accelerating nearly 10% higher. That was due to a significant change in a recommendation from a high-profile bank.
Thursday morning, Bank of America Securities analyst John Murphy upped his recommendation on the stock to buy from the previous neutral. In doing so, he also pushed the gas pedal on his price target, which is now $125 per share, from $90. At the new level, the stock now has nearly 27% potential upside, even after today's big gain.
Avis stock has been on a tear of late, as demand for rental vehicles has risen notably as an increasingly vaccinated population longs to break their stay-at-home isolation for some travel elsewhere (or at least a decent road trip more locally). Compounding that, disruptions in the supply chain have curtailed the output of new vehicles. This cranks prices for rentals.
Murphy feels that this dynamic won't melt away anytime soon. "Many of the macro factors driving 'over-earning' by the company in 2021 will likely persist well into 2022," he wrote in his latest research note on Avis.
"Combined with ongoing execution by Avis, this should result in upward revisions to 2022 and beyond estimates that do not appear appreciated by the stock," Murphy added.
Murphy's argument is certainly convincing and is compounded by the fact that Avis is basically the only viable auto-rental company traded on the stock market.
If anything, this new analysis understates the case, as supply-chain issues have a way of persisting. Once coronavirus case and fatality figures start to drop meaningfully, demand should get commensurately stronger.