Flat revenues reflect growing risk for Ryder shareholders

The shares of Ryder System were hammered following the release of fourth-quarter and full-year results that heightened the investment risk associated to holding stock in the US-based supply chain solutions and vehicle leasing provider, particularly given the mid-term outlook provided by management on February 2.

Quarterly revenues in fleet management solutions (FMS) – its core business unit – were flat year-on-year at $1.15bn, but rose 2% once currency adjustments were excluded. In FMS, commercial rental revenue dropped 14% due to lower demand, it noted, but fuel services revenues rose 5%, reflecting higher fuel prices passed on to customers. 

The second-largest contributor in terms of sales – the dedicated transportation solutions (DTS) business – turned over $257m during the period, up 11% on a comparable basis, due to higher volumes, new business wins and higher pricing. Meanwhile, the smaller supply chain solutions (SCS) division recorded a 10% growth rate in turnover, which rose to $430m from $392m year-on-year. 

Non-operating revenues – a non-GAAP figure that excludes fuel and subcontracted transportation – showed similar trends in the fourth quarter, aside from a much lower growth rate in DTS. 

Chairman and chief executive Robert Sanchez noted that “in the fourth quarter, the used vehicle environment proved even more challenging than expected, and we now anticipate these conditions to continue over the next 18 months”.

“Additionally, we adjusted used vehicle inventory valuations based on fourth quarter pricing and further declines anticipated in 2017,” he said, adding that the group also accelerated depreciation to “reflect lower pricing on vehicles in operation we expect to make available for sale through June 2018”.

Annual revenues confirmed that growth has become increasingly difficult to achieve, with gross turnover up only 3% to almost $6.8bn, and operating revenues rising 4% to $5.8bn.

Notably, annual free cash flow stood at $194m on the back of falling capital expenditures, which was a significant improvement against a negative -$728m in 2015. Ryder is “planning modestly higher capital expenditures” this year due to additional investment “to refresh our rental fleet”, while it expects to deliver operating cash flow of $1.7bn and free cash flow of $250m. 

Its debt-to-equity ratio remains within a long-term stated target range of between 225% and 275%. Given its growth projections, its balance sheet remains a bit stretched, although gearing as gauged by debt-to-equity fell to 263% at the end of 2016 versus 277% one year earlier.

Unsurprisingly, diluted earnings per share fell 14% to $4.90 and net income fell 14% to $262.5m, implying a forward P/E valuation of 14x that is not aligned with core cash flow multiples. As such, downside risk is apparent for shareholders after a year during which their holdings appreciated over 30%.

Source: Transport Intelligence, February 2, 2017

Author: Alessandro Pasetti