What happened
Shares of rental car company Avis Budget Group (CAR 0.52%) revved 6.5% higher Wednesday afternoon. As of 1 p.m. ET, Avis stock was up a healthy 6.5%.
You can thank JPMorgan for that.
Image source: Getty Images.
So what
This morning, investment banker JPMorgan removed its "underweight" rating from Avis stock and upgraded the shares to "neutral" instead.
Weighing "slightly lower estimates" against "a slightly lower target multiple," JPMorgan did feel it appropriate to lower its price target on Avis shares, granted, and cut its estimated valuation of the stock to $205 accordingly. Nevertheless, the banker still thinks Avis will benefit from greater rental industry pricing power and enjoy a "structural increase" in profit margins going forward.
Valuing the shares at 8x projected earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023, JPMorgan still sees room for plenty of upside in Avis shares -- and predicts new buyers today should see about a 14% profit by the end of this year.
Now what
Is JPMorgan right about that? Perhaps. Coming to basically the same conclusion but taking a different route, I see Avis as potentially bargain-priced at a recent valuation of less than 12 times earnings -- but with a projected long-term earnings growth rate of nearly 20%.
My one reservation about the stock is that Avis Budget continues to carry a very heavy debt load of $16.3 billion net of cash on hand. Arguably, this debt load is big enough to negate the value suggested by its low P/E ratio, as it's significantly greater in size than the company's own market capitalization.
Therefore, if there's one thing I'd urge investors to keep an eye on with this stock, it's Avis' debt -- and how fast it is paying that debt down.
