A blowout earnings report and a potential short squeeze has shares of rental car company Avis Budget Group Inc. skyrocketing in an extremely volatile session on Tuesday.
Avis reported third-quarter adjusted earnings per share (EPS) of $10.74, beating consensus analyst estimates by more than $4 per share. Revenue also exceeded Wall Street expectations, and the company authorized $1 billion in additional buybacks.
As good as the earnings numbers were, the huge move in Avis stock was likely driven in large part by a short squeeze. Avis’ short interest represented 28.8 percent of its float ahead of the earnings report, according to Ortex Analytics.
Why It’s Important
Avis shares closed Monday’s session at $171.46 but traded as high as $545.11 on Tuesday morning before pulling back significantly. The earnings beat was certainly impressive, but Bank of America analyst Aileen Smith said Avis’ valuation was already stretched even prior to Tuesday’s big run-up.
Smith said she is generally bullish on the rental car space given several tailwinds in the industry that will likely drive elevated earnings in 2022, including limited incoming vehicle supply, tight average fleet, elevated revenue per day, and elevated used vehicle pricing.
However, with the 50 percent+ run-up in the stock over the past month, “this now appears more appreciated in [Avis’] valuation,” Smith wrote in a note.
Bank of America has a Neutral rating and $200 price target for Avis shares, representing nearly 40 percent downside from the stock’s share price as of mid-day trading on Tuesday.
Earnings beats are great fundamental news for long-term investors, but short squeezes are short-term phenomena based strictly on temporary market dynamics. Whether an actual short squeeze occurred in Avis on Tuesday or momentum traders bought the stock believing a short squeeze was taking place, buyers should tread carefully with such a volatile stock.
By Wayne Duggan
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