For investors who haven’t taken a very close look, it’s understandable if Avis Budget Group (NASDAQ:CAR) and Hertz Global (NYSE:HTZ) seem pretty similar. However, there are differences and prospective investors of CAR stock should know that Hertz’s problems won’t all necessarily spill over to Avis.
Granted, Avis is in the same car-rental business niche as Hertz. And both companies can’t escape the financial damage brought by the onset of the novel coronavirus. So, there’s some undeniable commonality between the two companies.
That being said, it’s possible that some of the losses in CAR stock might be due to what’s known as the sympathy effect. In other words, some traders might have dumped their CAR shares just because Hertz is having problems.
But they’re not the same company, and any sympathy-effect “dumpage” could present a buying opportunity in CAR stock.
A Closer Look at CAR Stock
As we might have expected, CAR stock got slammed by shelter-in-place mandates and the decline in travel-market demand. Prior to that, the stock was in the process of making a run for the long-standing $50 resistance level.
It’s been heartbreaking to watch CAR bulls make several failed attempts to break and hold above $50 during the past five years. The coronavirus crisis gave traders a rare chance to buy the shares at less than $8 apiece.
That time has passed, but the stock is still far below $50, suggesting plenty of room for upside. Besides, with a trailing 12-month price-earnings ratio of around eight, CAR stock appears to present a compelling value proposition.
It Hertz So Bad
Hertz has generally generated more buzz than Avis in the financial press and on social media. Perhaps that’s because as a trading vehicle, Hertz is the poster boy of “trash stocks,” “bankruptcy stocks,” or the “Robinhood rally.”
But just because Hertz is hurting, this doesn’t have to translate into trouble for Avis. Hertz, at one time widely considered the gold standard among car-rental businesses, has issues that are primarily company-specific.
As has been widely publicized in the media, Hertz filed for bankruptcy protection in May. This came in the wake of the 102-year-old company’s unsettling declaration that “there is substantial doubt regarding the company’s ability to continue as a going concern within one year from the issuance date” of Hertz’s first-quarter financial report.
Next, Hertz received a notice from the New York Stock Exchange that the company’s shares are “no longer suitable for listing” on that exchange. That’s a polite delisting threat, but it hurts nonetheless.
And after the company received a judge’s approval to issue up to $1 billion worth of new shares, Hertz lawyer Thomas Lauria admitted that the shares “might ultimately be worthless, although it’s impossible to know this as a point of certainty.”
No Spillover Here
None of those problems are shared by Avis in any literal sense. Avis didn’t file for bankruptcy protection and didn’t receive a delisting threat from the New York Stock Exchange.
And, just as importantly, CAR stock didn’t increase seven-fold in three days like Hertz’s shares did. Thus, Avis isn’t the target of irrational, baseless hype to the extent that Hertz is.
Moreover, Hertz is difficult to value as it currently doesn’t even have a price-earnings ratio. That, very simply, is because the company’s in a negative earnings state.
As already mentioned, Avis has a PE ratio, and it’s low but not disturbingly low. Furthermore, Avis sports a positive free cash flow while Hertz’s free cash flow is assuredly negative.
The Bottom Line
The ongoing problems with Hertz are worrisome, but they don’t have to dissuade you from owning shares of CAR stock. The two companies aren’t the same, and their respective stocks reflect two entirely different sets of circumstances.
And as a value proposition, CAR shares look quite favorable while Hertz has little, if anything, to offer cautious investors.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
