Ryder (R) Shows Improved Leased Demand And Increased Capex Guidance; U.S. Moves Toward More Full-Term Lease Contracts Instead Of Extensions
January 23, 2012 - The Wall Street Transcript has just published Equipment Rental And Leasing Services Report offering a timely review of the Business Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Kevin W. Sterling, CFA, is Senior Vice President and Senior Equity Research Analyst in the transportation services group at BB&T Capital Markets, which he joined in July 2009. Mr. Sterling follows the maritime, airfreight and logistics sectors. He has been quoted in numerous financial publications, including The Wall Street Journal, Forbes and Investor's Business Daily, as well as a frequent guest on CNBC. Before joining the firm, Mr. Sterling followed maritime and rail supplier companies for Stephens Inc., where he was part of a team recognized by Institutional Investor magazine for transportation research among regional/boutique firms for four straight years. Mr. Sterling received a bachelor's degree from Randolph-Macon College and earned his MBA with a concentration in management science from Virginia Polytechnic Institute and State University. He is a Member of the Richmond Society of Financial Analysts.
TWST: What is going on in the industry given the current economy? Have we seen much of a change in the general pattern?
Mr. Sterling: The one company that pertains to leasing and rental that I follow is Ryder Systems (R). Ryder is seeing good demand in both their leasing and commercial rental business, and this is generally what happens when we enter a new cycle and come out of a downturn. The first segment of the truck population where we see an increase is commercial rental or the spot business. The reason being is that small businesses that operate a fleet of trucks start getting a little busier, but yet that small business owner is not willing to commit to purchasing a new truck or signing a long-term lease. Instead, the small operator will use spot capacity or commercial rental in case the demand is only temporary. That is what we have been seeing in the industry for the past nine months to a year. We have seen a really strong surge in commercial rental.
Now we are beginning to see the commercial rental demand translate to more leasing activity. That is really how a cycle works as a small business owner, whose core competency is not trucking but has some trucks to move his product around, thinks about augmenting his fleet. I find it encouraging that we are seeing an uptick in leasing because that tells me that the business community feels a little bit better about the environment and their long-term demand picture. Usually leases range in duration from five to seven years, which is a pretty big commitment by a small business owner. That is why a small business owner wants to make sure the demand is there.Looking at Ryder specifically, some of their key metrics are improving.
For instance, last quarter, Ryder saw the early terminations of leased vehicles decline by almost 650 units, or 22% year over year, to less than half what they were two years ago and the lowest level in the past decade. I believe the decrease in early terminations is a positive indicator of improved lease demand. Additionally, the number of lease extensions in the U.S. for the first nine months of 2011 declined versus the prior year, down 24%. The decline reflects an increase in new full-term lease contract sales instead of lease extensions by customers, and in my opinion, is a positive as more customers are willing to sign long-term leases instead of renewing for a short period of time.
TWST: You mentioned it's been a year or so when we began to see the change. Is that a normal cycle or is that longer than typical?
Mr. Sterling: It is a little longer cycle and that is because of the economic uncertainty. Commercial rental tends to be just a short-term fix and is the first part of the business that improves when demand picks up. However, given the fits and spurts of the economy, commercial rental activity has continued to be strong because small business owners and operators are not committed to purchasing expensive new trucking equipment with the potential to sit idle if the economy stalls. The better risk/reward in the eyes of small customers right now is to rent on a spot basis instead of commit a lot of capital to new equipment. Eventually, the majority of the commercial rental business leads to long-term leasing as commercial rental is not a viable long-term option for customers who need trucking equipment. Therefore, because of uncertainty in the economy, this cycle seems a little bit longer than normal, which has benefited commercial rental, but we are beginning to see the shift to more leasing activity, which is still a cheaper alternative to purchasing new, expensive equipment and having to maintain that equipment.
TWST: Is the shift we're seeing now typical or is it a little bit stronger than what you've seen in the past?
Mr. Sterling: It's actually a little bit stronger than what we've seen in the past. The early terminations and lease extensions that I was talking about earlier are at cycle lows, so I think that is good sign of underlying demand, but also the shift to more full-cycle leasing. There is another interesting dynamic that is happening benefiting leasing and that is the skyrocketing cost of new truck equipment. Since 2001, the cost of truck equipment has increased over 40%, and a Class 8 tractor now exceeds $120,000. That's a lot of capital to commit, plus the cost of maintaining the equipment is increasing. So if you're a small business owner, you may not be willing to commit that type of capital. You might look to leasing. Also, maintenance costs have been steadily rising in light of new engine requirements and standards. Thus, a company like Ryder that offers a full-service lease program also performs the maintenance on the equipment.
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