Ryder (R) Increases Capex Guidance; Capex Historically Shows Strong Positive Correlation To Earnings Growth; Large Transportation Equipment Purchases To Follow In 2012
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: Given we are seeing activity pick up, what's the competitive environment like?
Mr. Sterling: Believe it or not, the truck-leasing market is very fragmented. The two major players are Ryder (R) and Penske (PAG), with Ryder being the largest. After Ryder and Penske, the competition really drops off and tends to be dominated by regional and small competitors. I believe there is opportunity for companies like Ryder that can appeal to national organizations that have a need for leasing and rental activity, but also have a large regional presence that can appeal to smaller and local businesses. In fact, Ryder has two different sales teams - a national team to target larger, global businesses, and the local and regional sales offices that focus on small businesses.
TWST: Are we seeing price competition begin to pick up because the market is getting better?
Mr. Sterling: We have actually seen pricing rising. For instance, in the third quarter for Ryder, commercial rental pricing was up 11% year over year. I believe lease pricing is up anywhere between 5% to 8% year over year. I do not believe we are seeing aggressive price competition because we are still in the early innings of the cycle, and the market is not an oversaturated market with a lot of leasing, especially national leasing competitors. Furthermore, both Ryder and Penske tend to be more rational players. Economy rolls over and the company is left with a lot of equipment to lease and/or possibly sell at discounted rates.
TWST: Where is the demand coming from? Is it mainly big business at this point or is it broadly spread?
Mr. Sterling: I believe the demand is more broadly spread. I've talked to a fair number of private shippers, both small and large, and a lot of the smaller shippers. The problem is twofold. The cost of new equipment is rising, and they do not have access to capital to purchase new equipment. To the smaller shipper, leasing is an attractive option. Even for the big shippers, their core competency is not trucking, so does it make sense for a shipper to maintain an entire maintenance department and an expensive fleet of vehicles when this function can be easily outsourced to a company like Ryder.
TWST: As we look out, now that we're seeing a pickup here, what is your expectation? Is this is a beginning of a much better trend or is it too soon to tell?
Mr. Sterling: It looks to be a pretty good trend. The one metric that I pay attention to regarding future expectations is Ryder's capex guidance. Historically, when Ryder spends capex, the earnings follow, and we saw that in the previous cycle. In 2005, 2006 and 2007, Ryder's capex was 1.4 billion, 1.7 billion and 1.3 billion, respectively. Operating EPS in 2006, 2007 and 2008 were 3.98, 4.22 and 4.84, respectively. By the spring of 2008, the stock price was well on its way to 75 - could be an interesting parallel this cycle. Capex is important for Ryder because they have to spend capital to order new equipment. Recall, Ryder only orders new equipment when they have a lease in hand, thus an increase in their capex guidance means the leasing pipeline is healthy. At the beginning of the year, Ryder provides a capex outlook and will update it as the year progresses.
TWST: What's been the trend recently?
Mr. Sterling: We've seen an increase in capex the past couple of years, and in fact, 2011 is going to be a record capex year. Ryder will spend about 1.8 billion in capex, and I anticipate 2012's capex spend to surpass 2011's level and then the earnings will follow.
TWST: In terms of the regulatory outlook, are there any big changes coming up that companies are going to have to respond to or is everything in place at this point?
Mr. Sterling: We have had a couple of engine requirement changes in 2007 and 2010. There may be more on the horizon as the Department of Transportation continues to push for fuel-efficient and carbon friendly vehicles.
One thing I think is pretty interesting is that Ryder has now begun leasing natural-gas-powered vehicles, specifically in California. Once again, Ryder is embracing technological changes as I believe they are one of the few leasing companies that offer some natural gas trucks. In the next couple of years as more vehicles potentially become dependent on natural gas, I think Ryder could have a competitive advantage as they are early adopters of the new technology.
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