Morgan Stanley analysts upgraded Avis Budget Group (NASDAQ:CAR) to Overweight from Equal-Weight, raising the firm's price target on the stock to $230 from $182 in a note to clients Tuesday.
The rating lift has boosted CAR's share price by more than 3% premarket to over $212 per share.
The analysts told investors that with the backdrop of normalization in the car rental industry, they look for operational execution to preserve what could now be a higher floor for the industry.
"Profitability. It starts with higher RPDs and flows through down to margin with CAR commanding a higher EBITDA margin historically and on our estimates," they wrote.
"CAR has a history of being able to not only extract higher revenues but also lower costs and subsequently higher margins from their operations vs HTZ. During 1Q23, Americas CAR RPD was $8.66 higher vs HTZ ($71.30 CAR RPD vs $62.03 HTZ RPD), and their direct vehicle and operating expenses as a % of total revenues was 50.5% vs 59.6% for HTZ."
However, the analysts noted that revenue per day will come down as fleets right size and demand eventually normalizes.
"EBITDA margins should compress as used car prices normalize. Earnings will come down as the full impact of the increased rate regime flows through. With all that being said, we do believe the structural changes that have taken place in the rental industry that have the potential to create a new floor for both HTZ and CAR, though we see the CAR floor as being higher," they concluded.