Markets

Why Shares of Hertz and Avis Were Falling Today

What happened

Shares of Hertz Global Holdings (NYSE: HTZ) and Avis Budget Group (NASDAQ: CAR) were among the market's biggest losers today, sliding along with a broader sell-off on concerns about rising coronavirus cases and fading hopes for another stimulus package.

As a result, Hertz shares were down 6.6% as of 1:12 p.m. on Monday and Avis had given up 9.4%. Meanwhile, the S&P 500 was down 2.5%.

A person holds out a smartphone with an Avis rental car to summon the car

Image source: Avis Budget Group.

So what

The car rental industry has been highly sensitive to the pandemic, so it's not a surprise to see these stocks declining again. Hertz, which was suffering from a crushing debt burden, declared bankruptcy in May, though the stock continues to fluctuate with investor sentiment and macroeconomic conditions. Demand for rental cars plunged during the lockdown and has remained well below normal due to a sharp decline in air travel and business travel, and that trend seems likely to persist for the duration of the pandemic.

Numbers over the weekend showed new daily records in coronavirus cases in the U.S., and some European countries were beginning to impose some lockdown measures, including France, where most of the country would be under curfew after 9 p.m. All that led investors to bail out of car rental stocks again.

Meanwhile, with barely a week to go until an election, another stimulus agreement seems unlikely in the near term, and the combination of no new stimulus package and a rising wave of coronavirus infections could point to a long, dark winter for the U.S economy, especially for the rental car sector, which is tightly connected to discretionary spending on travel.

Now what

Hertz stock has essentially bottomed out since it declared bankruptcy in May. But surprisingly, Avis shares are only down 12% year to date as investors have been pleased with the company's ability to cut costs and manage through the pandemic, even as sales have plunged and it posted an adjusted net loss of $388 million in the second quarter. However, the earlier recovery in the stock makes Avis vulnerable to another wave of infections, especially if lockdown measures are implemented, as is already happening in Europe, one of its key markets.

We'll get an update when Avis reports third-quarter earnings later this week on Thursday. Analysts are expecting revenue to fall 47% to $1.45 billion, but still a see a slim profit of $0.07 per share.

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Jeremy Bowman 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.

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