Why Avis Budget Stock Stomped on the Gas Today

view original post

What happened

Shares of rental car company Avis Budget Group (NASDAQ:CAR) were up 4.4% as of 12:35 p.m. ET Thursday, helped by a couple of bankers on Wall Street giving it a bit of a jump start.

If you own Avis and want to know where to send your thank-you notes, you can address them care of Deutsche Bank and Bank of America.

Image source: Getty Images.

So what

This morning, Deutsche got Avis off to a running start when the German banker announced it is removing its sell rating from Avis and upgrading the shares to hold instead.  

“Since our downgrade of CAR post-market on November 2, its 2023E EV/EBITDA multiple has contracted … to 9.4x,” explained the analyst. This cheaper valuation is “due entirely to a 45.4% decline in shares of CAR [while] none of our forecasts have changed,” Deutsche said.

Or in other words: Avis stock got cheaper for no good reason — and in Deutsche’s opinion, cheap enough that the stock is no longer overpriced.

As for Avis’ business, Deutsche is still “constructive on rental car industry fundamentals in the near term,” explains the banker in a note covered on StreetInsider.com. And so “in the absence of compelling reasons to reduce either our target multiple or estimates,” the analyst concludes that “the most proper course of action is to change our rating from Sell to Hold, and that is what we have done.”

Now what

Now this doesn’t necessarily make Avis stock a buy, mind you. In fact, with Deutsche holding steady on its $210 price target, the banker only sees a couple of percentage points’ worth of potential profit in Avis right now.

On the other hand, Bank of America, which lowered its price target on Avis to $260 today, actually turns out to be more optimistic than Deutsche. If Avis is worth $260 (as BofA says) rather than $210 (as Deutsche maintains), then there’s actually the potential for a meaningful profit from the shares this year — as much as 27%.

Fact is, with Avis stock currently trading for just about 21 times earnings, and most analysts agreeing it has the potential to grow earnings better than 27% annually over the next five years, not only does Avis stock no longer look overpriced today, it kind of looks like a bargain.

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.