Avis Budget's stock falls after analyst downgrades it just two months after turning bullish

By Tomi Kilgore

Analyst Chris Wronka hopes his downgrade to hold is a 'refreshingly simplistic' rating change, as Avis' stock got too close to his price target

Shares of Avis Budget Group Inc. dropped Thursday, after Deutsche Bank's Chris Wronka downgraded the car-rental company, saying the stock nearly accomplished in just two months what he thought would take a year.

The stock (CAR) was driven 4.3% lower in midday trading. It had lost 1.5% on Wednesday, after closing Tuesday at a five-month high.

"In what we hope will be a refreshingly simplistic ratings change, we are downgrading [Avis Budget's stock] from buy to hold," Wronka wrote in a note to clients. "Importantly, we are not changing any of our forecasts or our target multiple."

Simply put, the stock has soared 46.7% since he recommended that investors start buying, after the stock closed May 30 at $163.27, through Wednesday's closing price of $239.48. Over the same time, the Dow Jones Transportation Average , of which Avis Budget is a component, has advanced 16.5% while the S&P 500 index has gained 8.6%.

Wronka said his upgrade in May was also primarily because of valuation, but he also saw a potential catalyst in the form of a likely return to share repurchases in the second half of the year. At that time, he raised his 12-month stock price target to $263 from $239.

At Wednesday's closing price, the stock was only about 10% away from Wronka's price target.

"While we don't view current valuation as being stretched by any means, we also believe prospects for multiple expansion from here are limited," Wronka wrote. "We also don't see a case for increasing our already Street-high estimates for 2024, resulting in what we view to be reasonably well-balanced risk/reward from current levels."

While the stock could remain volatile through second-quarter earnings season -- Avis is slated to report second-quarter results after the July 31 close -- Wronka believes the potential upside is now "somewhat limited" unless the company surprises him by reporting a large number of share repurchases in the latest quarter.

Avis Budget is expected to report second-quarter earnings per share of $9.45, down from $15.94 a year ago, while revenue is expected to slip 0.9% to $3.22 billion.

-Tomi Kilgore

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07-21-23 0826ET

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