Avis's stock drops after company sells record number of cars into a tough used-car market

By Tomi Kilgore

Avis says it is 'quite comfortable' with the supply-and-demand relationship of its EV fleet

Avis Budget Group Inc. investors were having their worst day in four years on Tuesday, after the car-rental company said it sold a record number of vehicles during the fourth quarter in a bad market for used cars, due to vehicle oversupply and a spike in interest costs.

Meanwhile, the company reported fourth-quarter profit that was well above expectations, despite a surprise decline in revenue.

"Currently, there is a considerable amount of volatility in the used-car market," said Chief Financial Officer Izzy Martins, according to an AlphaSense transcript of the company's post-earnings call with analysts. "However, we believe that it is prudent for our operations and healthy for the overall industry to exit vehicles despite the used-car-market conditions."

Avis's stock (CAR) plunged 22.7% in afternoon trading, to put it on track for the lowest close since Oct. 7, 2021. It was also headed for the biggest one-day percentage loss since it plummeted 36% on March 18, 2020, at the start of the COVID-19 pandemic.

The stock's price decline of $38.15 shaved about 233 points off the Dow Jones Transportation Average DJT, which tumbled 474 points, or 2.9%.

One reason the company sold a record number of vehicles was that it believed the used-car market was "normalizing" and it wanted to take advantage of that in order to "harvest gains" on older models.

Another reason was that deliveries of new-model-year vehicles were delayed by several automakers until after the summer peak, which made it "necessary to exit older vehicles to right-size our fleet size to demand," Chief Executive Joe Ferraro said.

While the company booked gains of about $50 million on the sale of vehicles during the quarter, that was down 60% even though "a lot more vehicles" were sold in the latest quarter, Martins said.

The need to sell into a bad market stemmed from a 70% increase in monthly per-unit interest costs, to $106 per vehicle from $62 per vehicle a year ago.

Gross depreciation per vehicle was $306, compared with previous guidance of "roughly $300" per vehicle. That is now expected to rise to $325 by the end of the first quarter.

The per-unit fleet cost per month jumped 53.9% to $277.

"In an environment where our core input costs are rising, both the cost of vehicles and the cost to finance, we must be hypervigilant in matching our vehicle supply to just under demand," Ferraro said. "And this year, it's more important than ever."

Ferraro also addressed the company's electric-vehicle fleet and EV demand, given that rival Hertz Global Holdings Inc. (HTZ) announced last month that it was selling 20,000 EVs due to weak demand and high maintenance-related costs.

He said Avis was "conservative" in its approach, given the uncertainty over demand from a rental standpoint. Therefore, he said, he was "quite comfortable" with the supply-and-demand situation with Avis's EV fleet.

"We haven't experienced any out-of-the-norm headwinds associated with our EV supply chain and maintenance-related issues," Ferraro said.

Regarding fourth-quarter results, Avis reported net income that fell to $260 million, or $7.10 a share, from $424, or $10.10 a share, in the same period a year ago.

The FactSet consensus for earnings per share was $4.15.

Revenue slipped 0.3%, to $2.76 billion from $2.77 billion, while the FactSet consensus called for an increase to $2.81 billion.

Rental days increased 5.3% to 42.03 million, while revenue per day fell 5.3% to $65.78.

The average rental fleet grew 11% to 518,928, and vehicle utilization declined to 65% from 68%.

Avis's stock has slumped 30.2% over the past three months, while shares of rival Hertz have shed 6.5% and the S&P 500 index SPX has gained 12%.

-Tomi Kilgore

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02-13-24 1459ET

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