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Avis stock: Pricing power is leading to ‘structurally higher margins,’ analyst says

Jefferies Equity Analyst Hamzah Mazari joins Yahoo Finance Live to discuss the outlook and price target for Avis stock.

Video transcript

BRIAN SOZZI: Shares of Avis are on a roll, up 675% year-to-date as the stock has been embraced by the retail trading community. Credit for that could be linked to two things-- a catchy stock ticker and signs of a fundamental turnaround at Avis. If you are in the name, should you stay the course?

Jefferies Analyst Hamzah Mazari is out today saying, let it ride on Avis, and lifting his price target to $333 from $100. And you're seeing the shares pop accordingly. Hamzah, good to see you here this morning. So you write at length about Avis and its prospects. And you say there are multiple levers here to drive upside in the stock. What's the most important one?

HAMZAH MAZARI: Yeah, it's a great question. Thank you for having me. So the biggest number here is pricing power. And when you think about that historically, these companies got maybe $60 revenue per day-- today, we're running above $80. And that is leading to structurally higher margins, higher than prior peak. This year, the company will do 25% EBITDA margins. Prior peak was 11 and change.

Now, we don't think we'll stay here, but we can be at 15% longer term. So pricing power is the number one driver. The other two drivers we would say are you have the international business, which is down 34%, 35% from pre-COVID levels. That used to be about 30% of revenue. 40% of the business is commercial. That hasn't come back, right? Business travel hasn't come back.

And then the other thing that you're seeing here is short interest is still pretty high. You know, we were at 37% short interest going into the Q3 print. Now, we're probably slightly under 15%. But I think you continue to see that short interest squeeze as well. And it doesn't hurt that Avis bought back 20% of their floor over the last four months.

And we think going forward, there's probably another billion dollar-plus buyback where you'd see the share count also continue to come down. So capital allocation and the buyback is also another big catalyst here.

BRIAN CHEUNG: What can you say about the volatility here? You were talking about the idea, and wrote in your note, about the possibility of further buybacks because of the position that they're in with the stock where it is now. But do you see volatility as maybe continuing through the elevated levels that we're seeing at, what, $142-- or sorry, $300 a share right now?

HAMZAH MAZARI: Yeah, we see the volatility continuing with the risk to the upside. So if you think about it, when they predict Q3 earnings, the stock went to $545. And we really wanted the stock to settle down before updating our numbers and coming back out, refreshing our thesis here. So you know, we talked about the short interest.

Short interest went from 37% down to 15% and change. That will continue to squeeze because pricing is going to continue to remain pretty strong for car rental through the end of 2022 at least because of how tight [INAUDIBLE] levels are, and the chip shortage, et cetera. It's very tough to add back supply today. And we think the companies will be disciplined. So that short interest, combined with pretty strong pricing numbers going forward, are going to lead to continued volatility but likely to the upside.

BRIAN SOZZI: Hamzah, I'm sure you're watching what's unfolding over at Hertz. It seems like a very re-energized company and brand under new CEO Mark Fields. How does that-- does that change anything with regards to your outlook for Avis?

HAMZAH MAZARI: Yeah, it's a good question. So you know, we don't cover Hertz formally. We dropped coverage when it went bankrupt and we haven't picked up since it's re-emerged. So what I can say, though, around Hertz is that, you know, you had a bad actor in the oligopoly for car rental that led to sort of a dysfunctional pricing model. And now, you're seeing a bad actor become a good actor, which we think will lead to a functional oligopoly with pricing power in car rental.

So what has changed? You talked about the management. Clearly, that's changed. But it's more than management. I think you look at their balance sheet, the balance sheet is now below 1.5 times levered. They were over 6 times levered when they were public previously, and they had a capital investment plan, because their IT systems were pretty old, that they had to really reinvest in the business.

So here, you have a bad actor that was chasing volume previously becoming a good actor that's not chasing volume, that's disciplined on pricing. And a big part of that is they're not handcuffed by a very large debt burden. And so that, we think, is a big positive as well. And that likely we think, again, will lead to structurally higher margins and profitability as a result of stronger pricing power in this space.

BRIAN SOZZI: All right, let's leave it there for now. Jefferies Analyst Hamzah Mazari over at Jefferies-- good to see you today and look forward to talking to you again soon.