Is Avis Budget (CAR) worth $298.07?

Surprisingly, car-rental giant Avis Budget (CAR) is one of today’s fastest growing stocks.

Mr. Market paid $74.71 for Avis Budget Group (NASDAQ: CAR) on 20 April 2021 and $298.07 for CAR on 22 April 2022. Hence, Avis Budget’s share price grew by $223.36 in a little over a year.

So why is a car rental company so popular with investors? Well, Avis Budget is growing fast. Stockrow estimates Avis Budget’s revenues grew by 211.97% in the quarter ending on 30 June 2021, 95.63% in the quarter ending on 30 September 2021, and 89.59% in the quarter ending on 31 December 2021.

Overall, Stockrow’s quarterly revenues grew from $1.355 billion on 31 December 2020 to $2.569 billion on 31 December 2021. Those quarterly revenues hit a high of $3.001 billion on 30 September 2021.

How Much Money is Avis Budget Making?

The Avis Budget Group (CAR) is making more money. The quarterly gross profit rose from $234 million on 31 December 2020 to $897 million on 31 December 2021.

Similarly, the quarter operating income rose from -$37 million on 31 December 2020 to $613 million on 31 December 2021. Hence, Avis is generating more profit and income.

Avis’s business is also generating more cash. The quarterly operating cash flow rose from $288 million on 31 December 2020 to $1.186 billion on 31 December 2021.

Conversely, Avis Budget reported a quarterly ending cash flow of -$319 million on 31 December 2021. The quarterly ending flow rose from -$895 million on 31 December 2020 and fell from $772 million on 30 June 2021.

Avis Budget borrows enormous amounts of money. The company reported a quarterly financing cash flow of $2.261 billion on 30 June 2021. The quarterly financing cash flow fell to -$134 million on 31 December 2021.

What Value does Avis Budget Group Have?

Consequently, Avis Budget’s total debt grew from $13.659 billion on 31 December 2020 to $17.805 billion on 31 December 2021. Avis Budget has enormous debts because it has to finance the purchase of tens of thousands of vehicles.

Avis Budget (CAR) keeps some cash. The cash and short-term investments fell from $693 million on 31 December 2020 to $537 million on 31 December 2021. The cash and short-term investments hit a high of $1.327 billion on 30 June 2021.

In contrast, Avis Budget’s total assets grew from $17.538 on 31 December 2020 to $22.600 on 31 December 2021. Hence, Avis Budget’s value grew in 2021. However, I see nothing at Avis Budget that justifies the $320.62 Mr. Market paid for it on 20 April 2022.

Why is Avis Budget Growing?

The global car rental market is growing. Statista estimates worldwide car hire revenue will reach $83.02 billion in 2022.

Moreover, Staista estimates car rental revenues will grow at a rate of 8.23% between 2022 and 2026. The global car hire market could have a projected market volume of $113.90 billion by 2026, Statista forecasts.  US car rental companies could generate $25.59 billion in revenue in 2022, Statista estimates.

The number of car rental users worldwide could grow to 604.2 million by 2026, Statista projects. Statista estimates the car-rental industry’s average revenue per user (ARPU) was $193.90.

I think Avis Budget (CAR) investors think international travel is about to recover. The number of international tourist arrivals grew from 957.2 million in 2010 to 1.464 billion in 2019, Statista estimates.

International tourist arrivals fell to 399.9 million in 2020 and 415 million in 2021 because of COVID-19. I suspect investors think international tourism and demand for rental cars could skyrocket as COVID-19 abates. Tourism could skyrocket because people are sick and tired of sitting at home and they want to travel.

However, new COVID-19 lock downs and the Ukraine War could put a damper on tourism. My guess is tourists will travel to areas where there is no war or COVID-19. For example, flying to Florida instead of Europe, or France instead of China.

Can Technology Boost Avis Budget?

Technology is another factor driving interest in car-rentals. Avis’s rival Hertz (NASDAQ: HTZ) has plans to buy 100,000 Tesla (TSLA) electric vehicles. Avis Budget has no specific plans to buy more electric vehicles but CEO Joe Ferraro and Chief Financial Officer (CFO) Brian Choi say management is working on an electric vehicle adoption plan.

Electric vehicles could increase Avis Budget’s profits because electricity is cheaper than gasoline. Moreover, electric vehicles could require less maintenance which could reduce Avis Budget’s expenses. I think EVs could help Avis Budget escape the oil price rise the Ukraine War could start.

Additionally, Avis is servicing Waymo’s self-driving Chrysler minivans. Waymo, the former Google Car, is testing self-driving minivans and experimenting with a self-driving ride hailing service.

Autonomous vehicles are not ready for mass adoption but I think self driving autos could be major moneymakers for Avis Budget if they work. In particular, Avis-Budget could increase its ride hailing and short-term rental offers. For example, self-driving cars that cruise around town searching for riders.

Despite its potential, I consider Avis Budget Group a grossly overpriced investors need to avoid. For example, Avis Budget pays no dividend.

If you want to invest in rental cars, I think Hertz (NASDAQ: HTZ) a better investment because Mr. Market paid $22.55 for HTZ on 22 April 2022. Hertz could be a value investment, but Avis Budget is just overvalued.

Originally published at https://marketmadhouse.com on April 22, 2022.