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Is It Profit-Taking Time on Avis Budget Group Stock?

Avis Budget Group (NASDAQ: CAR) shares have come all the way back from pandemic lows - and then some. Does an investment in the rental car company still have solid upside or is it profit-taking time?

This story originally appeared on MarketBeat

If you needed a reminder that the market is a forward-looking mechanism, look no further than the performance of Avis Budget Group (NASDAQ: CAR) shares since the start of 2021. contributor/ via MarketBeat

Here's how it went down:

The rental car company's shares plummeted by nearly 90% in a month at the outset of the pandemic. Once it became clear that Avis was unlikely to follow rival Hertz into Chapter 11 bankruptcy, shares recovered some, but not all, of their losses.

The November 9th vaccine news made Avis an appealing investment; shares were still trading well below pre-pandemic levels but the company appeared primed to make a full recovery in 2022. With investors seemingly losing interest in Avis in December, however, it seemed like another rally could be months – or even a year – away.

But investors have piled into Avis shares since the start of the new year; shares have nearly doubled YTD.

Your eyes are not fooling you – Avis shares are now trading well above pre-pandemic levels. Is the rally justifiable? Or has the market gotten irrational?

Let's look at the bull and bear cases. Starting with the bull case.

Why Avis Shares Are Worth It

Avis has navigated the pandemic about as well as you could have hoped. Last month, on the Q4 2020 earnings call, management said, "Ultimately, we removed over $2.8 billion of expenses and aligned our fleet to demand, removing 31% of our fleet while capitalizing on the strong demand in the off-airport operations."

The second wave of the virus brought fresh challenges in the fourth quarter; America's revenue dropped 33% to just over $1 billion, which was the "lowest fourth-quarter total in [Avis'] history." But adjusted EBITDA came in at an impressive $113 million. The Americas achieved their highest fourth-quarter margins in Avis' history.

The excellent margins can largely be attributed to Avis' fleet management. With demand expected to be low for the foreseeable future, Avis sold thousands of its vehicles. That lowered the company's fixed costs and gave Avis a much-needed cash infusion. A strong used car market allowed Avis to get top-dollar for most of those vehicles – that was pure luck – but management still deserves credit for the aggressive action.

Higher prices also helped to push margins higher, with "pricing up 3%" for the quarter. You would think that Avis would have to slash prices to attract customers during these times, but apparently, when you need a rental car, you need a rental car.

CEO Joe Ferraro thinks that the company can get its adjusted EBITDA up to around $1 billion a year post-pandemic. With a market cap of less than $5 billion, that would represent strong value at current prices.

Why Avis Shares Aren't Worth It

There were fears that Avis wouldn't make it through the pandemic less than a year ago. While that is no longer a concern, Avis isn't completely out of the woods yet. The company is projected to be right around break-even in 2021. Shares are changing hands at 18x 2022 earnings – a bit high for a company like Avis.

Avis could see solid growth in 2023 and 2024, which could make shares look cheap at their current valuation. But we're not talking about Amazon (NASDAQ: AMZN) here. Long-term growth is far from an inevitability with this company.

Then there's the debt. Avis has just over $11 billion in long-term debt. Management noted that Avis has "no meaningful corporate debt maturities until 2023" on the fourth-quarter call and the company should be in much better shape by then. But still, Avis' financial position is far from secure.

How Should You Play Avis?

Avis shares could justifiability trade a bit higher if investors gain confidence in the company's outlook in 2023 and beyond. But a lot of the upside has been exhausted. And even if shares do go up another 20% or so from here, it could take a couple of years for that to happen.

If you got into Avis back in December, you're sitting pretty right now. You might want to take profits on at least a part of your position so that you're playing with house money.

If, on the other hand, you never got in, your best bet may be to wait on the sidelines – Avis could be a bad quarter away from offering a more attractive entry point.

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