2 Options Plays On A 2016 Car Rental Recovery

Q3 earnings season for the two big names in U.S. car rental, Avis and Hertz, is set to kick off on Monday when Avis reports after the market close. In a new report, MKM Partners analyst Jim Strugger explained why he believes things could be on the upswing for the rental car business, but buying common stock may not be the best way to play the turnaround.

Industry Stabilizing

Both Avis and Hertz’s stocks have significantly lagged the S&P 500 this year, falling more than 20 percent year-to-date. According to Strugger, the weakness has been the result of market concerns over pricing power and continued uncertainty over Hertz’s financial situation. Now that Hertz is current on its financial reporting and MKM is starting to see signs that the rental car business is stabilizing, Strugger feels that this could be a good time to play a 2016 rental car recovery.

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Avis

MKM analyst Chris Agnew believes that Avis’ most recent metrics indicate that the company has eliminated much of the risk from its operations. The options market is currently implying a 5.8 percent post-earnings move from the stock and is skewed to the bullish side. “For directionally long exposure out to January, we like 55/60 call spreads for $1.25,” Strugger noted.

Hertz

MKM believes that CEO John Tague has brought some much-needed stability to the Hertz in his nearly one year at the helm, an indication that the company could have a bright 2016 ahead of it. “Again, looking out to January expiry, we like owning 22 strike, 27 delta calls for $0.60 (40.1 percent IV),” Strugger added.

Disclosure: The author holds no position in the stocks mentioned.