Avis Budget Group is Friday's IBD Stock Of The Day as the car rental giant looks to sustain higher profit margins even as the outlook for the economy and travel becomes more clouded. CAR stock rose closer to buy points from either a four-weeks-tight pattern or from a long, deep base.
Avis Earnings Blowout
After blowing past Q3 earnings estimates on Oct. 31, Avis stock suffered a bit of a letdown, because it's clear that the recent stretch of triple-digit profit gains is over.
Avis earnings soared 102% to $21.70 per share, about $7 ahead of estimates. A number of factors that contributed to the earnings surge will likely have diminishing effects, including tight supply for rental cars amid pent-up travel demand.
Revenue per day in international markets surged 33% from a year ago to $74.45. CEO Joseph Ferraro also noted that gains on vehicle sales contributed $360 million to Avis results, "reflecting our proactive decision to take advantage of a robust used car market."
Further, Avis expects to owe an extra $20 million to $30 million in vehicle interest payments in Q4 due to Fed rate hikes.
Here's the key question for profit margins, as Avis Budget CFO Brian Choi put it during the Q3 call on Nov. 1: "Is it a hard reset back to 2019 levels? Or is it a gentle slope with a longer runway that settles at a level materially higher than 2019?"
Ferraro made a case for the latter, with profitability remaining above historic levels. "We're a different company than we were in 2019." He cited prudence in managing vehicle fleet size, increased use of technology and progress in controlling costs.
In an Oct. 25 note, Jefferies analyst Stephanie Moore assumed coverage of CAR stock with a buy rating and 270 price target. She characterized the U.S. rental car industry as a functioning oligopoly with more disciplined control over the supply-demand balance. Moore figures Avis can sustain profit margins in the mid-teens range and revenue per day of $65+, vs. 2019 levels of $58 in the U.S. and $54 overall.
Analysts see Avis earnings soaring 145% for the full year to $55.16 a share, then tumbling to $26.15 in 2023. But that would still be well above the pre-Covid annual EPS near $3-$4.
Avis Stock
Avis stock rose 0.5% to 223.96 on Friday, finding support at the 21-day line. CAR stock rallied strongly into earnings, surging 59% in October, then sold off despite a huge earnings beat. But since falling 6.7% on Nov. 1, Avis stock has traded in a very narrow range on low volume.
CAR stock has a four-weeks tight pattern, with a 246.32 buy point.
A broader view shows a deep cup-with-handle base going back to mid-April with an almost identical buy point of 246.51.
Finally, aggressive investors could seize on a move past Tuesday's high of 232.10, which would be a break above the trend line from the high point in the recent tight formation.
A number of airline and hotel stocks are showing constructive action lately amid a business outlook that remains favorable near-term but a bit iffy beyond. However, the group of stocks hasn't seen many breakouts.
