The Avis Budget Collapse
In its earnings report last week, Avis Budget Group, Inc (CAR) shined a spotlight on how the trading activity of Pentwater Capital impacted CAR’s share price. During the conference call, the company described how Pentwater created a massive short squeeze. More importantly, the company called attention to Pentwater’s selling. The hedge fund disclosed a sale of 4.3M shares across April 22nd and 23rd that generated $1.75B gross. Avis Budget Group blamed Pentwater for the accompanying collapse in CAR. The stock chart says it all.
Avis was very careful to identify Pentwater as the most likely cause of the short squeeze and subsequent collapse in the stock. The company has not bought or sold any shares since 2024, and its largest shareholder, SRS, has not done so since 2023. Most telling, Avis pointed out that “Pentwater has acknowledged that its sale of Avis stock, at least in part, was violative of the SEC Section 16 short swing profit rules.” Investopedia describes this rule as follows:
“The short-swing profit rule is a Securities and Exchange Commission (SEC) regulation that requires company insiders to return any profits made from the purchase and sale of company stock if both transactions occur within a six-month period…The rule applies to any shareholder who owns more than 10% of a class of the company’s equity securities registered under the Securities Exchange Act, and to the company’s officers and directors.”
A Pending Investigation
Before the sales, Pentwater had accumulated and disclosed a 51% ownership share in Avis. Now, Avis is conducting an investigation by requesting trade documentation from Pentwater. The company also insisted that it will “aggressively pursue all rights on behalf of our stockholders.” It is not yet clear what Avis would do with any profits it receives from Pentwater. A payout to investors would be an amazing windfall for sitting in shares that artificially soared to prices many multiples of fair value while nothing changed in the business per Avis’s own words during the conference call.
The company’s description of the short squeeze and price collapse offers revealing details we often do not get for epic episodes of stock movement. Pentwater unleashed 4.3M shares into a market that averaged 663K shares traded daily before the initial breakout on March 23rd. The resulting buying vacuum created the persistent minute-by-minute selling that I described at the time. Buyers in CAR essentially disappeared during the first two days of the plunge. Shorts who could have bought shares for covering were already squeezed out and other potential buyers understood the music came to an end. The first day of selling printed a classic blow-off top.
Conclusion
Ironically, Avis delivered a good quarter all things considered. The company’s financial condition remains fragile, but the business has operating momentum. I asked ChatGPT for a concise summary of Avis’s financial condition based on the company’s transcript of the earnings call (I confirmed the accuracy of the numbers):
“Avis is improving operationally, but the balance sheet remains stretched. The positive signs are clear: Americas pricing turned positive for the first time since 2022, utilization is very high, fleet age improved, depreciation is falling, and EBITDA guidance was raised. These are meaningful signs that the company’s fleet-rightsizing strategy is working.
The main financial risk is leverage. Net corporate leverage was 7.6x at quarter-end, far above management’s stated 2x–4x target range. Management expects leverage to fall below 6x by year-end through EBITDA growth and debt repayment, but that depends on execution and a healthy summer travel season. Liquidity appears adequate, with more than $900 million available liquidity, about $2.9 billion of additional ABS capacity, and no corporate debt maturities until 2027.”
Still, I have zero interest in buying the stock. If the 200DMA breaks as a support, CAR becomes a short again. Moreover, analysts have turned uniformly bearish. Of eight analysts offering ratings, 5 have hold ratings, 2 have sell, and 1 has a strong sell. These ratings have held since April and mark the first time in 3 years that no analyst held any kind of buy rating on the stock. No analyst was fooled by the price action into upgrades or higher targets. The average price target is $123 with a low of $85.
Be careful out there!
Full disclosure: no positions