Shareholders of Avis Budget Group would probably like to forget the past six months even happened. The stock dropped 34.6% and now trades at $101.91. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Avis Budget Group, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Avis Budget Group Not Exciting?
Even though the stock has become cheaper, we're cautious about Avis Budget Group. Here are three reasons you should be careful with CAR and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within industrials, a stretched 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 1.5% over the last two years. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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. 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 $762.5 million of cash over the last year, and its $6.07 billion of debt exceeds the $519 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 quality test. After the recent drawdown, the stock trades at 25.7× forward P/E (or $101.91 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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