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What happened

Rental car company Avis Budget Group (NASDAQ: CAR) shocked Wall Street last week when it reported, on Thursday evening, a massive earnings beat — $1.13 per share in profit where analysts had forecast barely $0.15 per share — and a revenue beat as well.

Despite the good news, Avis stock suffered the next day, falling 8.3%. It’s falling again on Monday, trading down by 7.3% as of 1:45 p.m. EST. But why?

Glowing red stock chart arrow trending down

Image source: Getty Images.

So what

You cannot blame Wall Street for this one. In fact, the only analyst ratings change of the day was of the positive sort: reports that Deutsche Bank raised its price target on Avis stock to $38 — well above the $31 to $32 range it occupied Monday afternoon.

That positive note doesn’t seem enough to encourage investors to pile back into Avis Budget stock again — perhaps because, despite being better than expected, its third-quarter results were not really the kind you could call “good.”

Revenue declined 44% year over year as consumer demand for rental cars remained anemic amid the pandemic-prompted travel drought. Moreover, Avis warned that “normal fourth quarter seasonal declines in demand as we move from the peak summer period to the shoulder fall and winter period” could sap revenues even further.

Now what

Avis Budget is trying to make the best of a lousy situation. The company says it cut $1 billion from its expenses in Q3, and is “on track to deliver more than $2.5 billion of cost removal for the full year.” Cash flow was positive in the quarter, and year to date, it was positive to the tune of $632 million. And Avis has raised a further $2.6 billion in cash by liquidating inventory and “right-sizing” its rental fleet.

The real question now is whether even this is going to be enough to keep the car rental giant afloat under the weight of its $15.2 billion debt burden — or whether Avis will ultimately follow Hertz into bankruptcy.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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