Summary
- I think the most recent financial results have been good in many ways. Revenue and net income are up nicely, and the capital structure is better than in the pre-pandemic era.
- The problem is the fact that debt is rolling at a very inconvenient time, and I don't think the stock is pricing at that risk.
- Normally, I would sell put options on this company, but the premia on offer aren't sufficiently high at the moment.
It's been a little over a year since I decided to buy a small position in Ryder System Inc. ( R ) while selling puts on the stock, and in that time the shares have returned about 35% against a loss of about 13.5% for the S&P 500. I would love to brag about that, but as I pointed out, I bought only a small position in the stock. That written, the puts I've written on this business have expired worthless, which was gratifying enough. Today I want to work out what to do with these shares. Do I buy more at $96, hoping that the great performance will continue? Do I sell? Do I hold my small stake, knowing that by net cost is in the low $70s? I'll make that determination by looking at the recently released financial statements, and by looking at the valuation.
Welcome to the "thesis statement" portion of the program. I write one of these near the beginning of my articles to give you the "gist" of my thinking up front so you can get in, find out what I'm thinking, and leave before my stuff becomes too tiresome. You're welcome. I'll be selling my small stake in Ryder today, and won't be selling any puts at the moment. The reason for this is that I am nervous about the fact that the company needs to roll a large amount of debt in the very near future, and, as you may have heard, interest rates are rather high at the moment. In my view, the shares are not sufficiently cheap to compensate investors for taking on this risk. For instance, the dividend yield is about 140 basis points lower than the risk free rate. So, investors are being paid a negative risk premium to take on what I consider to be substantial financial risk. While I would normally recommend selling put options, the premia on offer at the moment are too thin. For that reason, I'm obliged to sit and wait for shares to drop in price from here. I may miss out on some future upside, but I think capital preservation is much more important than trying to generate excess returns.
Financial Snapshot
The most recent financial results have been quite good in my estimation. Compared to 2021, revenue and net income are up by 24% and 67% respectively. At the same time, cash from operations rose by a more modest 6.2%, which is still objectively impressive in my view. When we compare the most recent results to the pre-pandemic era, things look even better. When compared to 2019, revenue and net income in 2022 were higher by 34.5% and have swung from a loss of $24.4 million to a positive $867 million. That is quite a turnaround. Management has rewarded shareholders with this result by boosting the dividend by another 5.26% from last year to this, which is obviously supportive of price.
It's not all animated bluebirds and cookie dough over at Ryder, though. The capital structure has deteriorated from 2021, with debt higher by about $364 million, or 6.09%. That written, I'll admit that the level of indebtedness now is better than at any of the three years between 2018 and 2020. Interest payments have followed a similar pattern, and are up 6.5% from 2021, but were still lower than in 2019 or 2020.
The most significant problem I have with the debt load is the schedule at which it rolls over. I've plucked the following from page 92 of the latest 10-K for your reading pleasure. So, this year the company is rolling over $1.337 billion of debt, and in 2024, the company is rolling $1.52 billion. There's some relief in 2025, and then it rolls an additional $1.4 billion in 2026. So, the maturity schedule is quite short here. You may have noticed that interest rates have risen recently, and some people, like Jerome Powell, are suggesting that they will remain at elevated levels for longer than is generally believed . I don't want to arbitrate which side is right or wrong in this case, but we all have to acknowledge that there's a risk that this company will be rolling ~ $2.75 billion of debt at a time when rates are higher than they've been for a decade. I would be willing to add to my stake here, but only if I'm adequately compensated for that risk.
Ryder Debt Repayment Schedule (Ryder latest 10-K) Ryder Financials (Ryder investor relations)
The Stock
My regulars know that I consider the business and the stock to be distinctly different things. If you're one of my new followers, first, welcome, I guess. Second, I consider the business and the stock to be distinctly different things. This is because the business generates revenue by offering logistics and transportation services, while the stock is a bit of virtual paper that gets traded around based on a host of factors having little to do with the business. The company's decision to buy some shares, for instance, may drive the stock higher in price. That written, I should report that the company spent $543 million on buyback over the past year. Additionally, the stock price may go up and down depending on the demand for "stocks" as an asset class. There's no way to prove it definitively, but I think a reasonable case could be made to suggest that Ryder shares would be much higher today had the overall market not dropped quite a bit since I wrote about Ryder. Given that the financial statement valuation of the business is "backward-looking" and the stock is the crowd's forecast about the distant future, there's an inevitable tension between the two.
So, to sum up, the business generates revenue and net income, while the stock bounces up and down based on the crowd's ever-changing views about the future. In my view, the only way to successfully trade stocks is to spot the discrepancies between what the crowd is assuming about a given company and subsequent results. I like to buy stocks when the crowd is particularly down in the dumps about a given stock, because those expectations are easier to beat.
Another way of writing "down in the dumps about a given stock" is "cheap." I like to buy cheap stocks because they tend to have more upside potential than downside. As my regulars know, I measure the cheapness of a stock in a few ways, ranging from the simple to the more complex. On the simple side, I look at the relationship of price to some measure of economic value, like sales, earnings, and the like. I like to see a stock trading at a discount to both its own history and the overall market. When I last reviewed this stock, the shares were trading at a valuation of a CFO per share of 1.817, price to sales ratio of .425, and a price to book value of 1.583. Fast forward to the present, and the valuation hasn't changed very much in spite of the rise in stock price. The one thing that does have me somewhat concerned is the fact that the dividend yield is currently hovering around 2.5%. To refresh your memories, that's about 140 basis points lower than the risk free rate .
So, to sum up, at a time when the company is on the hook to roll a very large amount of debt at a time when rates are relatively high, investors are receiving a risk premium of negative 140 basis points.
As my regular victims know, I like ratios, but I want to move beyond simple ratios to examine the assumptions that underlie the current stock price. In order to do this, I rely on the work of Professor Stephen Penman and his book "Accounting for Value." In this book, Penman walks investors through how they can apply the magic of high school algebra to a standard finance formula in order to work out what the market is "thinking" about a given company's future growth. This involves isolating the "g" (growth) variable in this formula. In case you find Penman's writing a bit dense, you might want to try "Expectations Investing" by Mauboussin and Rappaport. These two have also introduced the idea of using the stock price itself as a source of information, and then infer what the market is currently "expecting" about the future.
Anyway, applying this approach to Ryder at the moment suggests the market is assuming that this company will now grow profits from current levels. I like that level of pessimism.
Although the shares are as cheap as they were when I started to "nibble", I am concerned about the level of debt that's coming due. I would say that the timing is inconvenient. I am also of the view that the world of investing is inherently relativistic, so if an investor can receive a nearly 4% risk free, it makes little sense for them to accept 37.5% less than that from a dividend that comes with risk. The only way that Ryder investors would accept that lower dividend is if they have faith that the company will continue to grow at these rates. In my view, it's great to have faith in family, in the transcendent, in a favourite sports team. After many decades of painful investing experience, I've learned that having faith in a commercial enterprise is not prudent. For that reason, I'm going to take my chips off the table.
Options Update
I feel an obligation to write about the successes I've had writing puts on this stock. I've generated a total of $4.65 selling put options that were about 20% out of the money. I think this strategy was a good one, because I am a fan of generating "risk adjusted" returns, and not just "returns." I took on much less risk to generate these returns, and so I consider them to be superior to the returns earned by stockholders in some ways.
While I normally like to try to repeat success, I think the premia on offer at the moment are too little to sell puts at this juncture. For instance, the August puts with a strike of $70 are currently bid at $.40. Given that I'd be required to tie up some capital to write these puts, I may as well put that capital to work in Treasury Bills and earn an annual 5% .
For further details see:
Taking Profits In Ryder System