Avis Budget Group has been on fire lately. In the past six months alone, the company’s stock price has rocketed 164%, reaching $153.15 per share. This was partly thanks to its solid quarterly results, and the run-up 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? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Avis Budget Group Will Underperform?

We’re happy investors have made money, but we're swiping left on Avis Budget Group for now. Here are three reasons there are better opportunities than CAR and a stock we'd rather own.

1. Weak Growth in Available rental days - Car rental Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Avis Budget Group, our preferred volume metric is available rental days - car rental). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Avis Budget Group’s available rental days - car rental came in at 63.58 million in the latest quarter, and over the last two years, averaged 1.5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

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 $1.39 billion of cash over the last year, and its $6.08 billion of debt exceeds the $541 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

We see the value of companies helping their customers, but in the case of Avis Budget Group, we’re out. Following the recent rally, the stock trades at 11× forward P/E (or $153.15 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

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