Ryder System: Don't Underestimate Its Shift To Leasing

seekingalpha09-14

Ryder System shares have gained 40% over the past year, outperforming the S&P 500, but are down 6% from their high.Management's conservative accounting and shift towards long-term leases have de-...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nRyder System: Don't Underestimate Its Shift To Leasing\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-14 16:50 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4721091-ryder-system-dont-underestimate-its-shift-to-leasing><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Ryder System shares have gained 40% over the past year, outperforming the S&P 500, but are down 6% from their high.Management's conservative accounting and shift towards long-term leases have de-...</p>\n\n<a href=\"https://seekingalpha.com/article/4721091-ryder-system-dont-underestimate-its-shift-to-leasing\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"NEX.SI","symbol_name":"绿达环球有限公司","start_time":0,"source_url":"https://seekingalpha.com/article/4721091-ryder-system-dont-underestimate-its-shift-to-leasing","article_id":"2467060359","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1058188022/image_1058188022.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2467060359","pubTimestamp":1726303800,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Ryder System shares have gained 40% over the past year, outperforming the S&P 500, but are down 6% from their high.Management's conservative accounting and shift towards long-term leases have de-riske","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"NEX.SI":"绿达环球有限公司","BK4196":"保健护理服务","BK6520":"工商业服务概念","BK4232":"货物陆运","BK6039":"环境与设施服务","BK4022":"陆运","FMS":"费森尤斯医疗","R":"瑞德系统"},"translate_title":"莱德系统：不要低估其向租赁的转变","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FMS":1,"NEX.SI":1,"R":1},"content_text":"Ryder System shares have gained 40% over the past year, outperforming the S&P 500, but are down 6% from their high.Management's conservative accounting and shift towards long-term leases have de-risked Ryder's business model, ensuring more stable earnings.Despite weaker used vehicle pricing, Ryder continues to generate gains on sales, contributing positively to earnings.With a strong balance sheet and ongoing business transformation, Ryder's shares are undervalued at 10.4x run-rate earnings, offering over 10% upside potential.   Stefonlinton Shares of Ryder System (NYSE:R) have been a strong performer over the past year, gaining 40%; however, the stock is down about 6% from its high after being promoted as a short idea. I last covered shares in April, reiterating them as a buy. Even with the recent pullback, they have outperformed the market, gaining about 12% vs the S&P 500’s 9% return. Shares are now trading near my $138 price target. Given this run and recent developments, now is a good time to revisit Ryder.   Seeking Alpha In its short piece, Hedgeye argued that Ryder has “never been more richly” valued and that lingering excess capacity could limit rental rates, particularly given macroeconomic challenges. Ryder does sit near an all-time high, though at 11x forward earnings estimates, it is not a particularly high-valued stock. Additionally, it is important to emphasize that management has taken several actions, from focusing on long-term leases to using more conservative accounting estimates that should improve the durability of results over the course of the trucking cycle. There are two ways the company has de-risked its business model. First, as a course of business, Ryder is always buying new trucks and tractors, depreciating them, and then selling them after several years to replenish the fleet. In the past, used vehicle pricing significantly swung the company’s P&L. Ultimately, if it signs a long-term lease assuming a certain residual value, but used vehicle pricing falls, the lease will have been less profitable than originally modelled. In an effort to insulate the business from this result, it now assumes residual values that match the lows seen during the COVID pandemic. To lose money on used vehicle sales and have leases turn out to be less profitable than assumed, we need to see truck pricing hit record lows, essentially. This is a very conservative assumption that means the company should consistently enjoy gains on sale of some magnitude.   Ryder System Now, as you can see from the above chart, used vehicle pricing has fallen considerably. In the past, this likely would have resulted in losses. Ryder still faces this weaker market condition, but it still is actually making money on sales, just less than it used to. In Q2, Ryder reported a $19 million gain on vehicle sales, down from a $55 million gain last year. This was a $0.62 headwind. As you can see below, proceeds are down from last year, given lower prices.   Ryder System In the company’s second quarter, Ryder earned $3.00. This was down from $3.61 last year. Essentially, the entire decline in earnings is due to smaller gains on sales. Ultimately, used vehicle pricing will continue to impact EPS, but in the past, there was a danger that used vehicle sales could detract from run-rate earnings. Now, used vehicle pricing should only add to run-rate earnings, it’s just a question of how much. I continue to believe it is best to initially value Ryder on a run-rate earnings basis, and it is easier to do so now that used vehicles are not a downside risk. Beyond that, Ryder has shifted its business towards leasing, and it now gets 60% of revenue from its integrated logistics units, up from 44% back in 2018. These long-term contracts provide cash flow visibility and helps to reduce the exposure to the trucking cycle, unlike the rental unit where pricing and utilization can vary by day. As you can see below, about 75% of its cap-ex spending is associated with lease vehicles. Given some softness in the macro, Ryder is pulling back on spending from last year, which enabled it to generate $71 million of free cash flow in Q2.   Ryder System This capital allocation is more clearly impacting its fleet composition, as you can see below. Its ChoiceLease fleet count is up 6,000 units, while its rental unit is down nearly 4,000. Rental utilization continues to be soft, at 69%, speaking to the subdued macroeconomic environment.   Ryder System Rental activity sits inside fleet management services (FMS), which has been the source of the greatest weakness. In Q2, FMS revenue was flat at $1.3 billion as lower rental demand offset increased ChoiceLease activity. Within FMS, leasing rose 10% to $856 million, while commercial rental fell 19% to $244 million. As it shifts its fleet, the rental becomes less and less of a headwind. Pre-tax earnings declined to $133 million from $180 million due to lower used vehicle gains. I would note it has 9,500 units for sale, above the 7-9k target, given softer conditions. While this unit has faced weakness from the down trucking cycle, its more integrated offerings, where it provides dedicated trucks or drivers to customers, are performing well. Supple chain solutions revenue rose by 14% to $989 million, with earnings up 13% to $85 million. There was 48% growth in dedicated transportation services (DTS) to $485 million, aided by its Cardinal Logistics purchase. Margins have contracted to 7.6% from 10.3% due to integration costs. As Ryder complete integration, that will be a ~$40 million (~$0.90/share) tailwind to earnings. Notably, these gains came even as Ryder has seen customer fleet reductions and delays in signing new contracts. It has 13,500 vehicles in SCS, down 1% while it has 19,900 vehicles in DTS, up 8,600, due to M&A. The underlying revenue growth and stability in profits, ex-M&A speak to how Ryder has reduced cyclicality in its business via contracting. Of course, contracts do not run forever, and prolonged downturns will impact results, but the volatility of Ryder’s earnings should come down, which supports a higher multiple. Additionally, it maintains a strong balance sheet. It has 245% debt to equity, which is below its 250-300% debt to equity target. Because of this, it has been able to do share repurchases, and there has been a 3% share count reduction to 44.6 million over the past year, alongside its 2.4% dividend yield. Indeed, given solid results, it tightened its guidance range from $11.75-$12.50 to $11.90-$12.40. Management is also targeting a long-term 20% long-term return on equity from 16% this year. Simply lapping M&A integration expense will drive about 40% of these gains; while a return to targeted leverage, ongoing mix shift, and somewhat higher long-term utilization can drive the rest, making this a credible goal.   Ryder System As such, I see about $12 in run-rate EPS from its underlying business in this mid-cycle trucking environment. With the Federal Reserve set to begin reducing rates, I do not expect further deterioration, and its contract business reduces volatility. Given its conservative accounting, I also continue to see at least $1 in gains from vehicle sales per year, for about $13 in total earnings.  That leaves shares about 10.4x earnings, which I would not view as expensive. Ryder is a capital-intensive business, so it is likely to retain a lower multiple, but as it shifts more towards leasing, I continue to view closer to 12x as a fair valuation, which can push shares past $150, enabling over 10% upside. Despite recent negativity, Ryder continues to deliver on its business transformation, and investors should stay long.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2467060359"}