Avis Budget Group (CAR)

Car rental services provider Avis (NASDAQ:CAR) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 4.7% year on year to $2.43 billion. Its GAAP loss of $14.35 per share was significantly below 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. Unfortunately, Avis Budget Group’s 5.3% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade 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 performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1.9% annually. 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.

We can dig further into the company’s revenue dynamics by analyzing its number of available rental days - car rental, which reached 56.82 million in the latest quarter. Over the last two years, Avis Budget Group’s available rental days - car rental averaged 2% year-on-year growth. 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 missed Wall Street’s estimates and reported a rather uninspiring 4.7% year-on-year revenue decline, generating $2.43 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 2.4% over the next 12 months. While this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

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 38.3% gross margin over the last five years. Said differently, roughly $38.32 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

In Q1, Avis Budget Group produced a 44.3% gross profit margin, up 20.8 percentage points year on year. On a wider time horizon, however, Avis Budget Group’s full-year margin has been trending down over the past 12 months, decreasing by 6.2 percentage points. If this move continues, it could suggest deteriorating pricing power and higher input costs (such as raw materials and manufacturing expenses).

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 17.4%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Avis Budget Group’s operating margin rose by 18.7 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Avis Budget Group generated an operating profit margin of 31.6%, up 33.8 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.

Sadly for Avis Budget Group, its EPS declined by 86.6% annually over the last five years while its revenue grew by 5.3%. We can see the difference stemmed from higher interest expenses or taxes as the company actually grew its operating margin and repurchased its shares during this time.

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.

For Avis Budget Group, its two-year annual EPS declines of 77.2% show it’s still underperforming. These results were bad no matter how you slice the data.

In Q1, Avis Budget Group reported EPS at negative $14.35, down from negative $3.20 in the same quarter last year. This print missed analysts’ estimates. 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 robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 10.4% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Avis Budget Group’s margin expanded by 6.9 percentage points during that time. This is encouraging because it gives the company more optionality.

Avis Budget Group’s free cash flow clocked in at $619 million in Q1, equivalent to a 25.5% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative 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 33.1%, 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 averaged 4.6 percentage point decreases each year. 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 $114.3 million of cash over the last year, and its $23.18 billion of debt exceeds the $516 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.

We were impressed by how significantly Avis Budget Group blew past analysts’ EBITDA expectations this quarter. On the other hand, its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. Still, the stock traded up 2.6% to $103 immediately following the results.

Updated: May 16, 2025 at 11:04 PM EDT

When considering an investment in Avis Budget Group, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

We cheer for all companies making their customers lives easier, but in the case of Avis Budget Group, we’ll be cheering from the sidelines. First off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its expanding operating margin shows the business has become more efficient, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

Avis Budget Group’s EV-to-EBITDA ratio based on the next 12 months is 3.4x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $116.75 on the company (compared to the current share price of $107.24).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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