Avis Budget Group (CAR)

Car rental services provider Avis (NASDAQ:CAR) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 1.1% year on year to $3.52 billion. Its GAAP profit of $10.11 per share was 27.9% above analysts’ consensus estimates.

Company Overview

The parent company of brands such as Zipcar and Budget Truck Rental, Avis (NASDAQ:CAR) is a provider of car rental and mobility solutions.

The growth of e-commerce and global trade continues to drive demand for shipping services, especially last-mile delivery, presenting opportunities for ground transportation companies. The industry continues to invest in data, analytics, and autonomous fleets to optimize efficiency and find the most cost-effective routes. Despite the essential services this industry provides, ground transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.

Public competitors in the car rental industry include Hertz (NASDAQ:HTZ), U-Haul (NYSE:UHAL) while a prominent private competitor is Enterprise.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Avis Budget Group grew its sales at an exceptional 13.5% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Avis Budget Group’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.3% over the last two years. Avis Budget Group isn’t alone in its struggles as the Ground Transportation industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

Avis Budget Group also discloses its number of available rental days - car rental, which reached 68.65 million in the latest quarter. Over the last two years, Avis Budget Group’s available rental days - car rental were flat. Because this number is higher than its revenue growth during the same period, we can see the company’s monetization has fallen.

This quarter, Avis Budget Group reported modest year-on-year revenue growth of 1.1% but beat Wall Street’s estimates by 1.8%.

Looking ahead, sell-side analysts expect revenue to grow 1.1% over the next 12 months. While this projection suggests its newer products and services will spur better top-line performance, it is still below average for the sector.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.

Avis Budget Group’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 38.1% gross margin over the last five years. That means Avis Budget Group only paid its suppliers $61.90 for every $100 in revenue.

Avis Budget Group produced a 57% gross profit margin in Q3, marking a 24.2 percentage point increase from 32.8% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Avis Budget Group has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Avis Budget Group’s operating margin decreased by 9.9 percentage points over the last five years. Many Ground Transportation companies also saw their margins fall (along with revenue, as mentioned above) because the cycle turned in the wrong direction. We hope Avis Budget Group can emerge from this a stronger company, as the silver lining of a downturn is that market share can be won and efficiencies found.

In Q3, Avis Budget Group generated an operating margin profit margin of 45%, up 32.6 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Avis Budget Group’s earnings losses deepened over the last five years as its EPS dropped 55.7% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Avis Budget Group’s low margin of safety could leave its stock price susceptible to large downswings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Sadly for Avis Budget Group, its EPS declined by more than its revenue over the last two years, dropping 81.9%. This tells us the company struggled to adjust to shrinking demand.

In Q3, Avis Budget Group reported EPS of $10.11, up from $6.64 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Avis Budget Group has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.3%, subpar for an industrials business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Avis Budget Group to make large cash investments in working capital and capital expenditures.

Taking a step back, we can see that Avis Budget Group’s margin dropped by 34.7 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Avis Budget Group burned through $1.89 billion of cash in Q3, equivalent to a negative 53.7% margin. The company’s cash burn increased from $283.1 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Avis Budget Group hasn’t been the highest-quality company lately because of its poor bottom-line (EPS) performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 35%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Avis Budget Group’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

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 $2.99 billion of cash over the last year, and its $6.06 billion of debt exceeds the $564 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.

It was good to see Avis Budget Group beat analysts’ revenue, EBITDA, and EPS expectations this quarter. We Zooming out, we think this was a good print with some key areas of upside. The stock traded up 9.6% to $170 immediately after reporting.

Updated: December 4, 2025 at 10:14 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Avis Budget Group’s business quality ultimately falls short of our standards. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its declining operating margin shows the business has become less efficient.

Avis Budget Group’s P/E ratio based on the next 12 months is 16.7x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $135.75 on the company (compared to the current share price of $133.80).