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Bear of the Day: Avis Budget Group (CAR)

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One might conclude that a stronger global economy would spell good news for companies engaged with the travel and tourism industries. While that is generally the case, certain businesses within this sector—including the rental car industry—face unique headwinds. For many companies, including Avis Budget Group (CAR - Free Report) , these headwinds are piling up right now.

Avis Budget Group is provider of vehicle rental services, with operations in more than seventy countries. The company operates the Avid and Budget brands. Avis is a leading supplier to the premium commercial and leisure segments of the travel industry, and Budget is a leading supplier to price-conscious car rental segments.

Nevertheless, Avis Budget Group is currently facing higher fleet costs and tough competition from lower-priced rivals. Shares have slipped more than 17% over the past four weeks, and analyst sentiment is worsening. CAR is currently sporting a Zacks Rank #5 (Strong Sell).

Latest Outlook

Avis is not expected to release its latest quarterly report until next week, but management did pre-announce some of its results last month. The company estimates that it will report full-year revenues of $8.81 billion, which was actually higher than our consensus estimate.

However, investors reacted negatively to management’s warning that 2018 will be more challenging than expected. Notably, the company cautioned that cost-cutting efforts would only partially offset the downward pressure of higher interest rates.

As we can see, that hesitation led to negative earnings estimate revisions:

Investors were also displeased by Avis Budget’s adoption of a poison pill to protect itself from an activist shareholder with a large position in the stock. Activist takeovers are obviously not a guaranteed improvement, but Avis clearly plans to control its own destiny, and that has current investors worried.

Based on our current consensus estimates, we expect Avis to report adjusted Q4 earnings $0.19 per share and revenues of $2.00 billion. However, CAR is sporting a Most Accurate Estimate of $0.15 per share, which more than 20% worse than its overall consensus. The Most Accurate Estimate is a representation of the most-recent earnings estimates, so this shows that analysts are less optimistic about the company’s Q4 performance than they once were.

Other Key Metrics

Investors might note that CAR is currently sporting an “A” grade for Value in our Style Scores system and seemingly presents some interesting valuation metrics right now. However, we must not be fooled by the effect that the stock’s recent price spiral has had on these numbers. Looking at CAR’s P/B ratio of 8.40 and Debt/Equity ratio of 35.24, we can see that the company’s financial health is in serious question.

Avis’ earnings date is quickly approaching, and as investors know, these reports can lead to significant share price movement. It is possible that CAR has already witnessed the full extent of its sell-off, but disappointing final results could lead to a further dip. I would sit this earnings report out.

Want more analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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