Avis soars as high car-rental demand meets supply shortages

AVIS Budget Group is on a tear. The car renter's stock closed at a record high on Wednesday as an economic reopening that's boosting travel demand collides with industrywide inventory tightness. Shares of Parsippany, New Jersey-based Avis rose 1.9 per cent to US$77.24, more than doubling so far this year and soaring from a pandemic low of US$7.78 in March 2020.

The industry is raising prices as post-vaccination business and leisure travel surges and household-name rental companies don't have enough cars for customers to drive off the lot. The firms are adding cars back to their fleets, but cautiously. During the early months of the pandemic, Avis and rivals Hertz Global Holdings and Enterprise Holdings sold large portions of their inventory and cut costs severely to shore up finances as US travel ground to a halt.

Now, their ability to restock cars is also being hampered by carmakers pausing production due to a global semiconductor shortage. Carmakers' sales to fleet customers fell about 30 per cent in the first quarter, according to analyst estimates. Carmakers are seeing nascent signs of increased fleet demand but are prioritising sales to higher-margin retail buyers.

"Fleet is definitely coming back," Judith Wheeler, Nissan Motor's vice-president for US sales, said in an interview on April 1. "We will try to do our part to give them some inventory, but we're going to focus on retail."

Even so, Avis shares continue to soar as main rival Hertz faces restructuring from bankruptcy and analysts see tailwinds from the pandemic lasting into the second half of this year.

"The rental-car companies all took inventories down. As the country is opening up, they don't have any cars," Maryann Keller, an independent vehicle consultant and former board member of Dollar Thrifty, said in an interview. "People are going to pay a lot more than they did before for the foreseeable future. Rental traffic is up quite a bit." Rental companies, she added, "will make a lot of money".

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Car-rental volumes likely rose in March as both Web traffic and pricing rose, Jefferies analysts led by Hamzah Mazari wrote in a note to clients on April 7. Jefferies, which scrapes company websites for pricing data using a proprietary model, found Avis prices had risen 8 per cent on a like-for-like basis in March from a year earlier. By comparison, it found Hertz's prices were up 15 per cent year-on-year that month. Overall Web traffic was up 3 per cent in March compared with pre-pandemic 2019. In February, Web traffic was still 13 per cent lower versus the same period in 2019.

Jefferies expects Avis to return to pre-Covid revenue levels in 2023 and industry fleet levels to normalise as early as the fourth quarter. At around US$78 a share, Avis's stock trades at a 37 per cent premium to analysts' average 12-month price target of US$56.80.

Avis is well-positioned to benefit from the recovery in travel demand as well as higher used-car prices, Morgan Stanley analyst Adam Jonas wrote in a note to clients April 7. BLOOMBERG