What the Heck Just Happened to Avis Budget Shares?

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What happened

After a heady rally in the first half of 2021, Avis Budget Group (NASDAQ:CAR) stock suffered one of its worst declines so far this year on Wednesday, finishing the session down 16.6%.

Although the car rental company delivered impressive second-quarter numbers, an analyst’s views on the stock post-earnings seems to have gotten investors wary about the upside potential left in it.

So what

Avis Budget reported its best quarter in history on the evening of Aug. 3. Here are some notable numbers from its earnings report (all changes year over year):

  • Fleet rental days: Up 84%.
  • Vehicle utilization: More than doubled to 71.3%.
  • Revenue: Up 212%.
  • Net income: Up 183%.

From one of its worst-ever quarters this time last year to its best-ever quarter today, Avis Budget’s turnaround is nothing short of remarkable. The company is making the most of the massive pent-up demand for travel created by the COVID-19 pandemic, and it especially helped that the economy reopened just as we entered the busy summer travel season.

A group of five people looking confused while looking at a clipboard.

Image source: Getty Images.

To give you an idea of the kind of demand Avis Budget witnessed, consider that it expanded its average fleet size in the Americas to 378,000 vehicles in Q2 from 295,000 vehicles in the first quarter. A shortage of semiconductor chips, and therefore a constrained supply of cars in the market, remains a big hurdle for Avis Budget. Yet management was able to expand its fleet thanks to several factors it highlighted during Avis Budget’s Q2 earnings conference call, including:

  • Strong partner relationships with automotive original equipment manufacturers.
  • Selling fewer old vehicles despite record-high used-car prices.
  • Remodeling vehicles to improve fleet utilization.
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While its efforts and quarterly performance are certainly impressive, Morgan Stanley believes much of the optimism is already baked into Avis Budget’s stock price.

Now what

There’s some merit in Morgan Stanley’s opinion: Avis Budget shares have, after all, more than doubled this year even after taking today’s price drop into account. In mid-June, Morgan Stanley raised its price target on Avis Budget to $85 from $73 a share, citing a resurgence in travel and strong rental pricing. The stock had rallied almost 20% since through Aug. 3, when it closed at a price of $89.82 a share.

That perhaps explains why Avis Budget shares tanked, but it makes little sense for the stock to fall off so sharply right after the company exceeded all earnings expectations.

Avis Budget expects the momentum to continue and believes its international segment could see a similar step up in profitability like its Americas segment once travel restrictions are lifted in the Europe, Middle East, and Africa regions. Now that’s one development investors may want to keep an eye on, as it could give the stock another lift amid fresh competition.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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