Avis Budget Group has had an impressive run over the past six months as its shares have beaten the S&P 500 by 14.8%. The stock now trades at $155.75, marking a 20.9% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Avis Budget Group, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Avis Budget Group Not Exciting?
Despite the momentum, we’re cautious about Avis Budget Group. Here are three reasons you should be careful with CAR, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Avis Budget Group’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1% over the last two years. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Avis Budget Group’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Avis Budget Group burned through $270.9 million of cash over the last year, and its $6.04 billion of debt exceeds the $528 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Avis Budget Group’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Avis Budget Group until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Avis Budget Group isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 11.8× forward EV-to-EBITDA (or $155.75 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re fairly confident there are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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