2024-01-10 04:51:02 ET
Summary
- Ryder System remains in a bull market and could see a further 20-30% gain before a long-term top is reached.
- Ryder's earnings have improved, but it is not recession-proof, and investors should be cautious of a trend change.
- Ryder's cash flow is increasing, allowing for fleet growth and sustainable growth initiatives, but debt and interest expenses remain a concern.
Intro
We wrote about Ryder System, Inc. ( R ) back in July 2020 when shares were coming up against long-term resistance (at the stock's 2011 & 2006 highs) just above the $40 handle. At the time, (due also to how the pandemic had impacted the company's earnings in a significant way), we took a conservative stance (Hold rating) in the transportation company while awaiting further developments.
As we see from the technical chart below, Ryder's bullish trend continued after our 2020 commentary buoyed by much improved earnings in the years that followed. Shares are now trading very close to their all-time highs. The three most obvious trends from Ryder's long-term chart are
- Ryder remains very much in a bull market where shares could easily see a further 20 to 30% gain before we print a long-term top in earnest.
- Although the vast majority of industries suffered considerable market-cap losses in the throes of the pandemic, Ryder's share-price performance in 2020 & 2009 demonstrates that the company is by no means a recession-proof stock. Therefore long-investors must always be on the alert to a trend change where one could use something like a death cross (crossing over of R's 10-month moving average below its 40-month counterpart) to spot long-term turns in the stock.
- Therefore, given how many shares are stretched above their 40-month moving average, we denote Ryder as a 'Hold' at this point.
Ryder Has Transformed Itself
Ultimately (for every investor), putting fresh capital to work in Ryder comes down to a risk versus reward paradigm. Although bottom-line earnings are expected to fall by over 21% this year due to the freight cycle downturn, expected comparable earnings of $12.80 per share would be an excellent result as the number clearly shows how the company has transformed through the balanced growth initiative. Based on trailing GAAP earnings, Ryder's earnings yield tops 9% which means the stated dividend yield of 2.51% remains well covered and should continue to be paid even if forward-looking earnings expectations do not pan out as expected.
We can see Ryder's transformation through Ryder's trailing return on equity metric of almost 16% which is well ahead of the company's five-year average (11.02%) as well as the sector median (12.23%). Therefore, management would state that given that a much higher percentage (85%) of the company's top-line revenues are now contractual, the resulting predictable cash flow should result in less volatility in the share price going forward all things remaining equal.
Cash Flow On The Up
If we study Ryder's cash-flow trends, we see that operating cash flow continues to increase aggressively where $2.37 billion is the current trailing 12-month figure & $2.5 billion is the estimation for this current fiscal year. This growing operating cash-flow base has enabled Ryder to put significant capital to work toward fleet growth. Therefore value investors should not be looking at Ryder's high free-cash-flow multiple ($100 million of free-cash-flow estimated in fiscal 2023) for valuation purposes but more at the operating cash-flow multiple (due to significant capex spend) which comes in at a very keen 2.12 over a trailing twelve-month average.
Apart from Ryder's aggressive capital allocation initiatives geared towards sustainable growth, the significance of the above trend concerning Ryder's increasing cash-flow trends can be seen on the company's balance sheet. Two key trends that remain in place are the growth of the company's book value ($3.097 billion at the end of Q3 ) and the sustained reduction of the share count (44.3 million at the time of writing). Furthermore, concerning the dividend , the payout remains well covered as alluded to earlier where shareholders have seen almost an 11% average annual growth rate over the past five years.
Suffice it to say, despite the huge run-up in shares of Ryder since the lows of 2020, due to strong earnings growth, shares could still be classified as being 'cheap' at this moment in time. However, when we couple Ryder's overbought technicals and tough trading environment (which will most likely lead to negative growth in fiscal 2024), we are reiterating our 'Hold' rating in this play. Furthermore, although Ryder's debt has been falling, the stock's interest coverage ratio of 3.24 & debt-to-equity ratio of 246% point to caution especially if there are more innings to this current freight downturn. Remember, the debt-to-equity ratio is only calculated off interest-bearing debt. If we were to include all of Ryder's obligations, the company's liability-to-equity ratio would come in at a much higher 395%.
Conclusion
Therefore, to sum up, although there is every opportunity that Ryder continues to trade higher, we would prefer a better entry in this play due to the overextended technicals & high-interest expense. Let's see what Q4 brings. We look forward to continued coverage.
For further details see:
Ryder System: Trailing Stop-Loss Looks Like The Best Strategy Here