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Why Avis Budget Group Stock Popped 10% This Morning

Rich Smith, The Motley Fool

What happened

Shares of Avis Budget Group (NASDAQ: CAR) popped more than 10% in early trading Monday and remain up a healthy 8.2% as of 12:10 a.m. EST. You can thank Goldman Sachs for that.

Goldman announced a complete reversal in its opinion of Avis stock this morning, going from "sell" to "buy" in eight seconds flat. The analyst also assigned Avis stock a new price target of $35, according to a write-up on StreetInsider.com [subscription required]. This implies the shares, currently priced below $28, could deliver as much as a 26% profit to new investors.

Rental car sign

If you follow Goldman Sachs' advice on Avis, will you be taken for a ride? Image source: Getty Images.

So what

According to Goldman's note, pricing and volume at Avis' core rental business are both holding up well. Moreover, Avis' secondary business of reselling cars (after it's done renting them out) could have upside potential, because car companies are refraining from offering generous sales incentives on new cars -- helping to maintain the residual value of the used cars Avis sells.

All of this, says Goldman, adds up to an argument that Avis Budget stock is valued attractively and should be bought.

Now what

And Goldman appears to have a point. At less than $2 billion in market cap, but with trailing profits of $372 million, Avis' 5.3 P/E ratio does look cheap -- at least on the surface.

That being said, let's not forget that Avis Budget stock also carries $14.5 billion in debt and has only $605 million in cash. The resulting enterprise value of nearly $16 billion on Avis stock means its debt-adjusted P/E ratio is closer to 42.7.

Even considering that Avis Budget suffered a near-50% reduction in profits last year and is expected to bounce back somewhat in 2019, I have to admit that that latter valuation has me a bit worried. Don't be surprised if investors decide to sell Avis stock back off just as fast as they bid it up today, once they realize just how much debt this new Goldman Sachs recommendation has hidden in its trunk.

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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.