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After a Big Gain in Avis Stock, Morgan Stanley Says It's Time to SellAfter a Big Gain in Avis Stock, Morgan Stanley Says It's Time to SellBary, Andrew. Barron's (Online); New York After a big run-up in Avis Budget Group stock, Morgan Stanley analyst Billy Kovanis has downgraded it to Underweight from Equal Weight, arguing that investors are too optimistic about the prospects for the car-rental industry. Avis Budget shares (ticker: CAR) were down 2.3%, at $146.32, in early trading Thursday, but they have risen more than 50% since mid-September and are up 313% year to date. Kovanis's price target on the stock is $110, up from $85. The analyst cited three factors: "peak cyclical earnings, a negative risk-reward, and a premature multiple re-rate." Investors have bid up shares of Avis and Hertz Global Holdings (HTZZ) based on a view that the current robust conditions in the rental-car market, with high pricing and elevated used-car prices, will persist into 2022 because of chip-related constraints on auto production. Kovanis says that the market seems to be expecting that Avis can generate $1.5 billion of earnings before interest, taxes, depreciation, and amortization (Ebitda) in 2023, while he sees Ebitda of $1.2 billion. Kovanis lifted his 2021 estimate for adjusted Ebitda to $1.9 billion from $1.6 billion and his 2022 estimate to $1.7 billion from $1.25 billion. The company is now valued at $10 billion and has an estimated $2 billion of debt at year-end 2021. He wrote that the market "is either ascribing more value in nearer-term earnings as opposed to normalized earnings in outer years or the market believes normalized Ebitda will be higher." "Alternatively, the market may be beginning to re-rate the stock and give the company a strategic premium for its fleet management capability," Kovanis wrote. Fleets of autonomous vehicles that may be on the roads in the coming years will need to be serviced and rental-car companies are ideally suited for that role. This opportunity for rental-car companies is several years away. Avis, for instance, has had talks with Waymo, the unit of Alphabet (GOOGL) that is the leader in autonomous driving, Kovanis noted. "We think the stock market has recently ascribed too much value in nearer-term earnings and has now begun to price in a scenario that we think is too optimistic in the medium-term. This is the core reason for our downgrade," he wrote. Kovanis's view is that it's hard to justify an Ebitda multiple of more than seven or eight. Kovanis added that the industry is historically cyclical and faces secular challenges from ride sharing and autonomous vehicles. |
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