Ryder (R): Interesting & Undervalued Pick in Logistics Space

Ryder Canada head office in Mississauga, Ontario, Canada.

JHVEPhoto/iStock Editorial via Getty Images

Ryder System (NYSE:R) is a near-90-year-old business headquartered in Florida. The company has significant overall upsides from a very fundamental perspective, as it offers services that currently (and historically) are in very high demand.

In this article, we’ll look at what makes Ryder tick and whether you could, and what to expect, from buying Ryder system as a dividend-paying stock-

Let’s get started.

Ryder System – What does the company do?

Initially founded as a concrete hauling company with one truck, James Ryder signed a five-truck lease deal with Champagne Velvet Beer back in 1938, marking the beginning of a legacy. Ryder has, since then, growing to encompass almost 43,000 employees in two nations, the United States and the United Kingdom, and today has revenues of nearly $10B, and that 20-50 truck fleet in the 1930s now encompasses almost 260,000 vehicles today. The company has 800 maintenance locations, and the customers are quite simply in every single segment and end market you could imagine.

Ryder Presentation

Ryder Presentation (Ryder IR)

Being in the logistics space on your own has become a very tricky venture. Unless you can present economies of scale, the nature of the ongoing supply chain evolvement, the pressure of disruptive technologies such as EV’s, automation, increased labor costs, more complex vehicles & vehicle maintenance which either requires expensive repair outsourcing or hiring expertise, problems with finding drivers – all of these factors lead industries to conclude one thing.

That they may be better off not owning their own logistical solutions or assets, but rather might prefer to outsource these to a third party who make it their business to address all of these challenges.

That, dear readers, is where Ryder System comes in. The company is a full-service logistics provider, whose revenue profile is mostly contractual, providing Ryder with a multi-year stable OCF while also reflecting an increased desire from customers to outsource their logistical solutions.

The company’s cash flows/segments can be split into two – Commercial Rental Vehicles, and ChoiceLease/DTS & SCS, which are all focused on locking in a longer-term revenue over the course of several years. You might expect, based on the recent 6-12 months in logistics that there has been no shortage of business for this company. You would be completely correct in this assumption.

On a high level, the commercial renting service that’s also the smaller part (less than 20%) of revenues is also the more CapEx-intensive of the two business. The longer-term leasing segments are expected to drive higher amounts of FCF going forward, and increased RoIC.

One of the core things you want to be looking at when comparing this company to peers is the amount of CapEx on a per-vehicle or per-segment basis. Initial cash flows in vehicle payments are recaptured through lease and rental payments, and no lease capital is committed until contracts are signed. The nature of Ryder FCF is counter-cyclical to GDP and macro, with 2020 record FCF of almost $1.6B reflecting lower lease and capital spending due to COVID-19 (and yet despite this lower spending, record incomes).

2021 FCF dropped to $1.1B and 2022E FCF is somewhere in the $200-$300M range. However, declining depreciation impact across the board is expected to contribute to a stronger RoE, currently expected at 20-22% for the full year.

The company’s capital allocation priorities are clear.

Ryder Capital allocation

Ryder Capital allocation (Ryder IR)

The company’s recent historical results put it into a good position for long-term growth. The growth we’re seeing in the lease-segment with an increasing amount of companies seeking to outsource their logistical operations are net benefits to the company’s bottom line. Enhanced lease returns are the result, and the company has been able to re-price 40% of its leasing portfolio at higher return spreads and lower residual assumptions.

Ryder is also pushing some of those costs down by making maintenance more effective with millions in savings, and they intend to leave the low-return FMS business in the UK behind. Some of these things are already moving, such with the recent news that TIP Trailer services is acquiring trailer leasing, rental, maintenance and repair for EU/Canada from the company.

It’s therefore to be expected that Ryder, going forward, will more be a logistics outsourcing company and service business, as opposed to having a massive U-haul business.

Ryder knows what it wants and what it targets – and this recent transaction is expected to close in June of 2022.

There’s a lot to like about Ryder. Sure, there are risks to the business. COVID-19 laid bare some of the disruptions in the supply chain as well as management’s response to these impacts. There’s also, as competition heats up, the risk of increased pressure from competitors in a transportation sector that’s not exactly short of capital or competition.

However, I believe that many investors are misunderstanding the inherent ebb/flow of the company’s free cash flow cycles in where economic downturns actually produce, at least for a short time, an on-paper improved result due to less CapEx spend.

Sure, Ryder’s debt isn’t exactly in the clear. At 56% LT debt/Cap, this company’s debt is on the high side despite its IG-rated BBB credit.

So, to summarize. A great business with some great fundamentals taking advantage of a fundamental shift in transportation and logistics. Learn the ebb and flow of the company’s OCF/FCF before trying to decipher results here. Risks exist – primarily competition and debt – but at its heart, Ryder System is a fundamentally solid business in logistics – albeit a volatile one on a historical basis.

It is, as I see it, a fundamental “value play”.

And here is why.

Ryder System – The valuation

This won’t be a whole drawn-out affair, because the various cases to Ryder are fairly simple, and my stance is clear here.

I view Ryder System as chronically undervalued next to any conceivable forward upside.

Yes – the company has inherent historical cyclicality. Take a look at EPS and valuation trends.

Ryder Systems EPS/Valuation

Ryder System EPS/Valuation (Ryder IR)

Not exactly subtle, this cyclicality. While long-term Ryder investors have done pretty well averaging RoR of about 7% annually since 2002, there are very clear investing and selling points in this company’s history.

Given where we’re going, it’s clear to me we’re moving into a time when we should be buying Ryder, not selling it. This seems to be the exact opposite of what the markets want us to do, based on recent price action by the company.

You can argue, you can fight against it, kick and scream – but the fact is that Ryder is currently trading at a trough multiple to EPS/P/E of lower than 6.5X to 2021 results. The upside back even to a 5-year normalized P/E of 13.5X is just south of 42% annually until 2024E.

Ryder Upside

Ryder Upside (Ryder IR)

Again, there are degrees of certainty here. Can you legitimately say that Ryder is worth $160/share. Well, might be a stretch. Ryder has never really broken the three-digit share price barrier for any extended amount of time, so it would require some massive re-orientation of the share price here. I don’t think we’ll see it until 2024E – not quite – but we might see it in the very long term.

Analyst forecasts are a crapshoot here. FactSet analysts regularly (50%) miss earnings even with a 20% margin for error, with misses of 50%, 100% and 80% in the last 10 years. There is a lot of uncertainty baked into things here, and the company’s cheap nature and valuation certainly reflect this.

Let me put it to you like this.

I believe that, based on fundamental upsides and business moves, Ryder’s trajectory for the coming 2-4 years will be a positive one. I believe the dividend is well-covered. I don’t see a massive debt risk in the sense of default given the market demand for logistics and transport.

The risk factors you should account for when looking at Ryder as an investment should be grounded in facts – conservative facts. And I put to you, there are not many of them.

The company yields almost 3.7% which is extremely well-covered, and we’re on our way, in my opinion, to a significant upcycle for the company.

I think the case for investing in Ryder here is very strong – and that’s why I intend to start a small position in the company that I want to build out.

S&P Global gives the company a massive upside of 32.2%, with 8 analysts giving an average of $66-$105/share. However, as with some companies, these analysts don’t put their money where their mouths are. Street recommendations are only 1 buy, with the remaining 7 at various versions of “HOLD” or “SELL”, which obviously does not align with where the company is currently trading.

I’m at a “BUY” with a PT 9X to 2022E at a 20% discount due to cyclicality which comes to $80/share, giving us a decent upside.

Thesis

The thesis for Ryder Is a fairly simple one.

  • Ryder is a significantly undervalued trucking/transport company that’s shifting from renting to leasing and has a significant conservative upside to where it’s currently trading at. I would consider this company a “BUY” with a significant upside to a conservative PT of $80/share.
  • The company’s drivers include increased demand and industry consolidation to outsourcing of logistical solutions, efficiencies, and experience. The risks are increased competition and a somewhat higher debt level than we might like to see.
  • Overall, the pros and cons clearly come out in Ryder’s favor.
  • I say “BUY”.

Remember, I’m all about:

  • Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
  • If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
  • If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
  • I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Ryder is a “BUY” here with a PT of $80/share.

Thank you for reading.

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