Avis Rallies To New High, But There's Reason To Be Cautious

Car rental company Avis Budget Group NASDAQ: CAR has overcome plenty of doubts from investors and analysts, as well as a downturn in business during the pandemic. 

The stock is trading in new high ground after clearing a cup-with-handle base in August.

On October 13, Morgan Stanley downgraded the stock to underweight from equal weight, according to MarketBeat data. Analyst Billy Kovanis said investors had gotten too giddy about Avis' business outlook.

Nonetheless, investors shook off Morgan Stanley's concerns, with the stock rallying more than 4% on Monday, to a new all-time high. '

Even with his downgrade, Morgan Stanley's Kovanis lifted his price target from $85.00 to $110.00.

Already the stock had been on a tear. After notching a small gain in 2020, Avis is up 304.75% year-to-date.

Clearly, investors have been optimistic about Avis' prospects post-pandemic.

Selling Off Fleets

Back in the spring of 2020, as Covid restrictions were put into place, Avis and other car rental companies sold off their fleets, as demand was low and companies needed cash to keep operations afloat.

As the economic recovery bounced back faster than expected, along with consumers' desire to get out and about, the rental companies were left without enough cars. So now travelers are experiencing sky-high prices when they try to rent a vehicle.

While that's not ideal for customers, it does mean higher revenue for companies like Avis.

After five quarters in a row of declining year-over-year revenue, sales bounced back in the most recent quarter to the tune of $2.371 billion, up 212% from the year-earlier quarter.

Still, Avis' three-year revenue growth rate stands at -15.17%.

Earnings, too, rebounded after losses in four of the past five quarters. Avis reported net income of $5.90 per share, versus a loss of $5.60 per share a year earlier.

Industry Revved Up For Big Changes

In addition to customer demand picking up now, there's reason to believe the car rental business will change even more in the coming years. For example, self-driving vehicles may become a bigger part of rental companies' fleets, although that isn't expected to happen immediately. Avis reportedly has held discussions with Google's autonomous driving unit Waymo.

Avis shares are up 9.24% in the past week and a whopping 67.74% in the past month.

Overall, the analyst consensus rating on the stock is a "hold" with a price target of $99.20, a 37.32% downside.

Avis reports its third-quarter on November 1, with analysts expecting earnings of  $6.86 per share on revenue of $2.66 billion. Both would be increases over the year-ago quarter.

According to MarketBeat earnings data, the company topped Wall Street analysts' earnings views in the past seven quarters.

Projected Decline In Earnings

For the full year, analysts expect Avis to earn $14.02 per share, up from 2020's loss of $6.21 per share. Next year that's seen declining 41% to $8.32 per share.

Although the stock's chart is very strong, and the earnings outlook for the full year is bright, there's still reason to be wary about Avis. The projected decline in earnings for 2022 is potentially worrisome, and that seems to confirm Morgan Stanley's thesis that investors have become overly optimistic about the stock.

Investors who are enamored with the current uptrend should at least wait until after the company reports its next quarter on November 1. As with any stock, a surprise in the earnings report could send the stock lower, although a nice price lift could create some feelings of FOMO in those who waited.

Unless you're simply taking a flier on a stock with a small amount of money, I believe it's always better to err on the side of caution, especially around earnings.

At this time, as the stock is extended beyond recent support at the 10-day moving average. Shares closed Monday at $158.32, up $7.35, or 4.87%, in trading volume 6% above average.