Avis Budget and Hertz Global: A Pair Trade Opportunity

Avis Budget Group and Hertz Global Holdings are dominant players in the car rental space, with both experiencing a steady decline. However, investment firm Pershing Square's founder Bill Ackman's recent acquisition of a 9.3% stake in Hertz has sparked a rally in both stocks, creating a potential pair trade opportunity.

Investment firm Pershing Square's founder Bill Ackman's recent acquisition of a 9.3% stake in Hertz Global Holdings (NASDAQ:HTZ) has sparked a rally in both Avis Budget Group (NASDAQ:CAR) and Hertz stocks, creating a potential pair trade opportunity. Both companies are dominant players in the car rental space, but have been experiencing a steady decline in revenues due to decreasing demand in the commercial sector and increasing demand in the luxury segment.

The recent rally in both stocks was driven by the increase in used car prices, as the secondary market reacted to the Trump administration's intention to increase tariffs on auto imports. Rental car companies like Avis and Hertz have little to no exposure to tariff risks, making them attractive to investors. Ackman's involvement in Hertz has further boosted investor confidence, with the stock rallying more than 40% and squeezing about 20% of short interest.

Avis and Hertz are both actively enhancing their operational efficiency by selling old fleets at high residual prices and purchasing young, cost-efficient fleets. This strategy has led to increased fleet utilization and vehicle disposition proceeds at all-time highs. For example, Avis gained about $2.2 billion in Q1 2023, which increased to $3 billion in Q1 2025, resulting in a 3.5 percentage point increase in fleet utilization to 69.4% [1].

However, both companies face significant challenges. Their balance sheets remain highly leveraged, and revenues continue to decline. Avis' income statement showed a 5% decline in revenue in Q1 2025, with a 15% increase in total expenses, resulting in a 377% increase in operating loss. Hertz's revenue decreased by 13% in Q1 2025, with a 24% increase in operating loss. Both companies are raising non-vehicle debt to repay vehicle-related debt, which could increase their interest expenses over time [1].

Despite these challenges, Avis appears to be in a better position than Hertz. Avis has a more focused strategy on reducing interest expenses, which could further increase operating cash flow. Hertz's interest expenses are at an all-time high since 2020, which could negatively impact its bottom-line performance. Additionally, Ackman's involvement in Hertz opens doors to potential value-accretive partnerships, such as with Uber, which could increase fleet utilization and profitability [1].

In conclusion, while both Avis and Hertz are executing similar strategies to enhance operational efficiency, Avis appears to be in a better position due to its focus on reducing interest expenses and maintaining lower total expenses. However, both companies face significant challenges, and the market remains bearish on Avis, with short interest above 18%. Investors should carefully consider these factors when evaluating the potential pair trade opportunity between Avis and Hertz.

References:
[1] https://seekingalpha.com/article/4800251-avis-budget-group-and-hertz-global-the-ackman-rally-gave-us-a-pair-trade