Florida-based truck-hire company Ryder System (R) is in a prime position to benefit from improved economic conditions in the US and its shares offer ample re-rating potential. Rental businesses tend to be particularly cyclical as rising demand boosts rents from their assets as well as the proportion of the time they are out on hire for. In addition, habitually high debt levels amplifies the effect on EPS. Ryder is already benefiting from these dynamics, and given a lowly rating, the shares could have a long way to travel.
- Fleet renewal rapidly improving margins
- High second-hand truck prices
- Commercial rental better than expected
- Outsourcing trend gathering pace
- Proportion of profit from vehicle sales
- Conservative outlook
The group's first-quarter profits easily beat forecasts, margins are improving and earnings should grow 10 per cent this year. Adjusted earnings per share for the first three months of 2013 jumped 17 per cent to 81¢, 4¢ better than consensus estimates and ahead of Ryder's own guidance. Pre-tax profit jumped by a fifth to $61m (£39.4m) at the core fleet management solutions (FMS) division and margin on sales excluding fuel were up 100 basis points on the first quarter of 2012 at 7.4 per cent. Margins are tipped to nudge 10 per cent in 2013, according to broker FBR Capital, which also predicts that they will eventually exceed the previous cyclical peak in 2008 of 13.1 per cent, driving double-digit earnings growth for years.
While uncertainty still exists about the veracity of the US's economic recovery, demand at Ryder's particularly sensitive commercial rental business has been stronger than expected in North America. Rising freight volumes mean the smaller supply chain unit, which provides a full logistics service, is ramping up profits, too. Chief executive Robert Sanchez reckons bullish trends will continue through the second quarter and, while his decision to stick with full-year EPS guidance of $4.70-$4.85 has been met with some disappointment, it did not stop a slew of analyst upgrades.
Indeed, the American Trucking Associations' for-hire truck tonnage index has risen in four of the last five months. And a rising proportion of the privately owned 7m-strong US truck fleet still is being outsourced, driven by demand for new fuel-efficient trucks, increasingly complicated and potentially expensive maintenance work, restricted access to capital, and tighter safety regulations. Sales teams are "very busy", says Mr Sanchez.
RYDER SYSTEM (US: R) | ||||
|---|---|---|---|---|
| ORD PRICE: | $56.77 | MARKET VALUE: | $2.95bn | |
| TOUCH: | $56.75-56.77 | 12-MONTH HIGH: | $61.73 | LOW: $32.76 |
| DIVIDEND YIELD: | 2.3% | PE RATIO: | 10 | |
| NET ASSET VALUE: | $28.28 | NET DEBT: | 268% | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share ($) | Dividend per share ($)† |
|---|---|---|---|---|
| 2010 | 5.14 | 186 | 2.38 | 1.04 |
| 2011 | 6.05 | 279 | 3.34 | 1.12 |
| 2012 | 6.26 | 303 | 3.93 | 1.20 |
| 2013* | 6.58 | 388 | 4.87 | 1.25 |
| 2014* | 6.89 | 434 | 5.50 | 1.28 |
| % change | +5 | +12 | +13 | +2 |
Beta: 1.8 *Jefferies (earnings are not comparable with historic figures) †Dividend forecasts for 2013 and 2014 are consensus estimates £1=$1.54 | ||||
Ryder's fuel-efficient fleet is just four years old and newer trucks come with warranties and cost less to maintain, which is helping margins. The recent rapid replacement of fleet means more old vehicles to sell, and high second-hand prices should deliver $28m of depreciation expense benefits in 2013. Winning more contractual business is good for profitability, too. In fact, so-called full service leases, where Ryder buys the vehicles and provides all the support for between three and 10 years, generated over $2.1bn of revenue in 2012 and maintenance work another $187m.
True, buying all those trucks, tractors and trailers sucks up a lot of cash, but big debts are perfectly normal for this type of business and a total debt-to-equity ratio of 268 per cent is well within Ryder's 250-300 per cent target range. What's more, better margins have tripled the spread between the return on capital and the cost of capital over the past year to 90 basis points, and spending less on the commercial rental fleet helped generate an extra $148m of free cash flow.
