Things are looking up for corporate truck leasing and sales firm, Ryder System (NYSE:R). It just raised its full-year profit forecast after beating second-quarter earnings expectations. Is it too late for you to cash in by buying the stock?
The longer-term trends for Ryder are looking good. It just raised its 2011 EPS forecast about 14%, from a range of $2.90 to $3 to between $3.33 and $3.43 per share.
There are two general reasons for Ryder’s bright outlook — market and strategy. Specifically, the effect of the March earthquake and tsunami in Japan and overall demand for leasing or buying commercial trucks suggest better-than-expected market trends. And thanks to its acquisition strategy — such as its recent purchase of European truck leasing company Hill Hire Plc — Ryder is on a roll.
The question for investors is whether the stock price already reflects this good news. Here are three reasons why it might have further to climb:
- Great earnings reports. Ryder has been able beat analysts’ expectations consistently and has done so in each of its past five earnings reports, including its most recent one. In that report, issued Wednesday, Ryder beat analysts’ adjusted earnings expectations of 77 cents per share by 19% — earning 92 cents per share on revenue of $1.51 billion.
- Cheap stock. Ryder’s price-to-earnings-to-growth ratio of 0.86 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty cheap. It currently has a P/E of 22.01 and is expected to grow 25.5% to $3.84 in 2012.
- Decent dividend. Ryder’s yearly dividend of $1.16 per share is yielding 2.01%.
Here are two reasons to pause:
- Under-earned its capital cost. Ryder is earning less than its cost of capital — and it’s stagnant. How so? It produced no EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half 2011, Ryder’s EVA momentum was 0%, based on first six months’ 2010 annualized revenue of $5 billion, and EVA that improved from -$370 million annualizing the first six months of 2010 to -$355 million annualizing the first six months of 2011, using a 9% weighted average cost of capital.
- Shrinking but cleaning up its balance sheet. Ryder has been shrinking with thin profit margins. Its $5.1 billion in revenues have fallen at an average rate of 2.2% over the past five years, and its net income of $123 million declined at an average rate of 11.6% during the period. Its debt has declined while its cash has risen. Its debt fell at a 2% annual rate, from $2.5 billion (2006) to $2.3 billion (2010), and its cash increased at a 13.4% annual rate, from $129 million to $213 million.
Ryder has a steady track record of beating analysts’ expectations, but its balance sheet and long-term growth challenges make it a risky investment. If the momentum it demonstrated in the second quarter continues, then it might look, in retrospect, that Ryder is at the beginning of a long up-cycle.
Given its low valuation, investors might be rewarded for taking that risk if things continue improving in Ryder’s markets and strategy.
Peter Cohan has no financial interest in the securities mentioned.
