2023-10-24 08:12:49 ET
Summary
- Custom Truck One Source delivered double-digit net sales growth in Q2 2023 and announced the purchase of new fleets, enhancing future capacity.
- The company's expansion into new markets and its flexible business model may lead to further sales growth and market share capture.
- Custom Truck's new ESG efforts may attract interest from ESG-focused funds and increase demand for the stock.
Custom Truck One Source, Inc. ( CTOS ) delivered double digit net sales growth for Q2 2023, and announced the purchase of new fleets, which may enhance future capacity. Also, with new ESG efforts and after declaring massive market opportunity from T&D end-market, CTOS could be an interesting read for many investors out there. Yes, there are some risks from M&A integration, debt, and supply chain problems, however I believe that the company appears undervalued.
Custom Truck One Source
Custom Truck One Source is a company that offers, through its subsidiaries, sales and rental services of specialty equipment, parts for end markets, and related services such as the repair and maintenance of equipment with customized applications.
Custom Truck's primary customers are in the power transmission and distribution, telecommunications, waste management, and infrastructure solutions markets within the United States. The products are available to independent contractors in the rental or complex electricity and lighting network businesses.
Custom Truck designs, manufactures, distributes, and sells its equipment, among which we find trucks with baskets for the transportation of light cargo, drilling and excavation rigs, garbage trucks, cranes, and service trucks among others.
The company's operations are divided into three reportable segments: equipment rental solutions, sale of trucks and equipment, and services and parts for end markets. The current expansion allows the company to offer its services in 35 cities in Canada and the United States. The company also provides technical advisory service 24 hours a day, every day of the year. Due to this position, experience, and recognition, Custom Truck is one of the reference companies at the local level when it comes to the rental of services for the installation and transmission of electrical networks industry.
The business model of offering its own fleet for the operation of other businesses, with an integrated network for the immediate contracting of services in the areas where it is present, allows the company to access a series of clients from various industries, and the projections of the company are made based on the forecast on the activity of these markets. In terms of results, if we base ourselves on the statistics obtained for the year 2022, the sale of equipment is the segment that represents the highest income for the company.
With that about the business model, I believe it is worth looking at the valuation of Custom Truck One Source. Pre-earnings analysis indicates that the company could deliver EPS GAAP close to $0.04 and a revenue estimate of $418 million. Given the beneficial results reported in the latest quarter's earnings, many investors may be looking at the new Q3 report on November 8.
FCF Catalyst: Further Market Expansion, Total Market Opportunity In The Electric Utility T&D End-market, Telecommunications Infrastructure, And Public Railroads
I believe that further expansion of its position in the markets in which it participates, taking advantage of its wide range of channels, and deepening the relationship with existing customers will most likely bring net sales growth.
The forecast on the market position that the company can capture by combining the operations of its three segments is valued at many billion dollars.
Capital expenditure spent in the electric utility T&D end-market is approximately $65 billion annually. This spend is driven by a number of attractive dynamics, demonstrating that the U.S. is potentially in the very early stages of a multi-year electric utility T&D spending cycle. Construction spend on telecommunications infrastructure has exceeded approximately $80 billion annually in recent years. The six largest public railroads operating in North America spend more than $10 billion annually in capital expenditures. Source: 10-k
Besides, the competitive advantages regarding its flexible business model and territorial expansion will most likely play a role when trying to capture more market share. With regards to the total market opportunity, investors may want to have a look at the following lines from the annual report.
New Fleets, Capacity Expansion, And Further Acquisitions Will Most Likely Bring FCF Growth
Custom Truck expects to allocate a series of investments to the purchase of new fleets in order to meet the growing demand coming from the different markets in which its clients participate. Along with these points in its growth strategy, we have added the search to achieve the positioning of its products in new end markets as well as geographical expansion through the acquisition of businesses and infrastructure networks that include distribution centers and customer service centers. In my view, these initiatives will most likely bring business expansion.
New ESG Efforts Will Most Likely Bring The Interest Of The Growing Community Of ESG Focused Funds, And May Bring Stock Demand
The company announced an ESG report , including initiatives and priorities encompassing environmental compliances, sustainable operations, business ethics, and corporate governance. Given the number of new funds recently created, I believe that many new investors will most likely have a look at Custom Truck, which may enhance net sales growth.
With a projected compound annual growth rate of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years. Source: PwC report
Source: Investor Presentation Q2 2023
Balance Sheet
The company reported an asset/liability ratio larger than two along with a healthy current ratio, which basically means that the balance sheet appears quite clean. With that, it would be a good idea for investors to have a look carefully at the total amount of debt, which is not a small amount.
More in particular, as of June 30, 2023, the company reported cash and cash equivalents worth $42 million, accounts receivable of about $151 million, financing receivables of close to $41 million, and inventory worth $765 million.
Goodwill is also quite large, equal to $704 million, with intangible assets close to $291 million, and total assets worth $3.138 million. I believe that the accumulation of goodwill comes from the transaction reported between Custom Truck One Source, L.P, and Nesco Holdings. Given the expertise in the M&A markets, I would be expecting further acquisitions in the coming years.
Nesco Holdings, Inc., which has been renamed as Custom Truck One Source, Inc. effective today, in partnership with an affiliate of Platinum Equity, LLC, today announced the closing of the previously announced transaction to acquire Custom Truck One Source, L.P. for a purchase price of $1.475 billion. Source: Nesco Holdings
Source: 10-Q
Among the list of liabilities, the most remarkable are accounts payable worth $117 million, accrued expenses close to $67 million, current maturities of long-term debt of $3 million, and total current liabilities of about $729 million.
Besides, with long-term debt of about $1.425 billion, finance leases of close to $3 million, and derivative, warrants, and other liabilities of about $1 million, Custom Truck reports total long-term liabilities of about $1.489 billion.
Source: 10-Q
Given the total amount of debt, I studied a bit the credit facilities signed and their interest rates. In the last quarterly report, the company reported interest rates close to 5.8% and 7.3% with notes payable reporting 3.1%-5%. I believe that these figures are very relevant to assess the cost of capital in any discounted cash flow model. I did use them in my valuation assessment.
Source: 10-Q
My Financial Model, Which Is In Line With The Expectations Of Other Analysts
My financial valuation includes net income close to $153 million, depreciation and amortization worth $706 million, but no amortization of debt issuance costs, no loss on extinguishment of debt, and no gain on sales and disposals of rental equipment. I tried to avoid extraordinary events in future cash flow statements.
I also included provision for losses on accounts receivable worth $44 million, share-based compensation of about $39 million, changes in accounts and financing receivables of about -$18 million, and changes in inventories of -$190 million.
Source: FCF Expectations
Additionally, I included prepaids, operating leases of about -$52 million, changes in accounts payable of -$53 million, and customer deposits and deferred revenue worth -$28 million. I obtained net cash flow from operating activities of close to $658 million. Finally, taking into account purchases of rental equipment worth -$311 million, 2030 FCF would be close to $347 million.
Source: FCF Expectations
My figures are pretty much in line with the expectations of other analysts and the 2023 outlook, so I believe that it is worth having a look at them. Analysts are expecting 2025 net sales close to $1993 million, 2025 EBITDA of about $489 million, 2025 net income of $108 million, and 2025 free cash flow of about $204 million.
Source: S&P
The updated 2023 outlook includes Adjusted EBITDA growth close to 8%-13% and consolidated revenue between 10% and 16%. I believe that the figures are quite beneficial.
Source: Investor Presentation Q2 2023
With the previous FCFs obtained, a WACC between 5%-9%, and EV/FCF close to 11x-15x, I obtained a stock valuation between $5 per share and $13 per share. Note that my WACC is in line with the cost of debt reported by Custom Truck. Besides, my EV/FCF multiple is close to the median reported in the sector.
Source: SA
My results also included a minimum internal rate of return of close to -1%, maximum IRR of 16%, and a median IRR of close to 7%. In any case, I believe that Custom Truck One does appear undervalued at the current price mark.
Source: My DCF Valuation
Competitors, And Risks
The industry is highly fragmented, and offers varied competition between national distribution networks, and another series of companies that have regional reach. In this sense, the company enjoys competitive advantages, as it is one of the traditional leaders in its market, and it served, during 2022, more than 3,000 clients throughout the country, of which the 15 largest concentrated 25% of the company's operations.
The company's current risks are mainly due to the inflationary situation of the global economy, which forces it to establish higher prices for the service since raw materials and supply networks for the manufacturing of equipment have increased. Furthermore, any decline in activity in the industries serves indirectly a significant reduction in the company's operating margins. Within these factors, we must also add the volatility of the price of oil, which directly affects the company and its supply chain.
In the financial sense, it is good to highlight that the company declares a high debt situation from which it will have to cancel obligations in the short term, which could complicate future access to lines of credit or forms of financing. Furthermore, taking into account that the projection of sales is high at this time does not ensure the success of operations in the future.
Conclusion
Custom Truck One Source does not only expect double digit net sales growth in 2023, the company also noted the purchase of new fleets, which may enhance capacity. Taking into account the massive market opportunity reported, benefits from public investments in infrastructure, and recently designed ESG reports, Custom Truck may be in the radar of many investors out there. I do see risks from failed acquisition integration or debt risks, however I think that the company appears quite undervalued.
For further details see:
Custom Truck: ESG Efforts, Capacity Expansion, And Cheap