ryder initiating report

7/27/2019 Ryder Initiating Report

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INITIATING COVERAGE REPORT William C. Dunkelberg Owl Fund18 September 2013

Ind

ustrialsSectorTrucki

ngandCommericalTransportation

Ryder System, Inc.Exchange: NYSE Ticker: R Target Price: $72.60

RECOMMENDATION BUYRyder $ 62.04

Dividend Yield 2.27%

Projected Return 19.31%

Market Data

52 week trading range $42.78-$

Shares Outstanding ($mm) 52.3

Market Capitalization ($mm) $3,176.8

Enterprise Value ($mm) $7,017.7

Financial Data ($mm)Cash & Equivalents $73.4

Debt $3,914.4

Earnings History

Earnings Date EPS Revenue

FY12 Q3 $1.25 $1,573.3

FY12 Q4 $1.17 $1,583.5 4

FY13 Q1 $ .81 $1,563

FY13 Q2 $1.25 $1,604

Analyst Consensus Estimates

Earnings Date EPS Revenue

FY13 Q3 $1.44 $1,630.01

FY13 Q4 $1.33 $1,639.74

FY14 Q1 $.93 $1,618.84

FY14 Q2 $1.38 $1,668.65

All prices current at end of previous trading

sessions from date of report. Data is source

local exchanges via CapIQ, Bloomberg and o

vendors. The William C. Dunkelberg Owl fun

and seeks to do business with companies co

in its research reports. Thus, investors shoul

aware of possible conflicts of interest that c

affect the objectivity of this report.

Michael Lam

Lead Analyst

[email protected]

Gabriel Tursi

Associate Analyst

[email protected]

Jesse Barone

Associate Analyst

[email protected]

COMPANY OVERVIEW

Ryder is a leader in transportation and supply chain management solutions with a fleet of

over 170,000 vehicles. They operate in two business segments: Fleet Management

Solutions (65.89% of revenue, 72.75% of profit), which provides full service leasing,

contract maintenance, contract-related maintenance, and commercial rental of trucks,

tractors, and trailers to customers principally in North America with some presence in the

U.K; Supply Chain Solutions (34.11% of revenue, 27.25% of profit), which provides

comprehensive supply chain consulting including distribution and transportation services

in North America and Asia. Ryder operates primarily in the US (83.6% of revenue) with

operations in Canada (7.63% of revenue), Mexico (2.29% of revenue), Europe (6.14% of

revenue), and Asia (.32% of revenue).

INVESTMENT THESIS

The trucking industry is highly responsive to economic conditions and relevant events.

Ryder is especially reactive because it is a highly levered company. In the past 6 months

the US economy has experienced tapering scares from the Federal Reserve, oil price

fluctuation due to events with Syria, and a government shutdown. These events have

stagnated the overall industry, specifically Ryder, which now trades at a discount versus its

peer group and the S&P 400 Trucking Index based on 3 year implied EV/EBITDA and P/E

multiples. However, Ryder is still one of the leading providers of transportation and

logistics services, and continues to benefit from a stable economic moat that is developed

from the capital intensive nature of its industry, its fleet size and facility locations, and its

one-stop differentiation strategy. Ryders continuing expansion of its natural gas vehicle

count, the declining age of its overall fleet, and the stable growth of its leasing volume has

positioned the company to benefit from the growing industry and the recovery of the US

economy.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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T h e W i l l i a m C . D u n k e l b e r g O w l F u n d Page

Catalysts Drag Factors

Ryder has expended its natural gas fleet size to over

300 vehicles and is continuing to grow its number of

natural gas maintenance facilities. This gives thecompany a first movers advantage as vehicles that run

on alternative fuel begin to grow more popular and

become more accessible in the industry.

Ryder continues to replace part of their fleet with new

vehicles in order to decrease the average age of the

overall fleet. The younger fleet requires less

maintenance and is more efficient which in turn lowers

costs and boosts margins.

Earning leasing contracts with large services company

(Mama Bosso, ARR Craib Transport, and Food

Authority) along with the continuing recovery of the US

economy will increase the long term growth of Ryders

full service leases.

The North American freight sector and transportation

services sector is forecasted to grow sales by a CAGR of

3.3% and 3.4% for the next five years as the economy

continues to recover.

Ryders underfunded pension funds accumulated a net

pension equity charge of $645 million and $595 million

at the end of 2012 and 2011. These are one time

charges in 2013, which frees up cash flow in 2014 for

future capital expenditures or shareholder returns.

About 83.6% of total revenue is from the US market. This

makes Ryder highly correlated with the macroeconomic

conditions of the US market. Therefore, any disruptions inthe recovery of the American economy would cut down

revenue growth.

Ryders costs fluctuate along with fuel prices. Any shortage

in supply or increases in price would compress the

companys margins and earnings.

Each business segment is subject to compliance of

government regulations on safety, air emissions, and

drivers service hours. Any infraction of these regulations

hurts public image and yields hefty fines; therefore adding

more costs to the company.

Ryder not only faces competition from its trucking peers, but

from financial lessor and other transportation/logisticsectors. Any shifts in pricing power could inhibit Ryders

ability to increase leasing rates and compress margins.

DESCRIPTION: NARROW and STABLE

Barriers to Entry: Ryder operates in a capital intensive

industry where high barriers of entry are created from thelarge capital and time investment required to start in the

industry.

Differentiation: The FMS segments customized approach to

leasing and the SCS segment supply chain add-on services

creates synergies to make Ryder a one-stop shop.

Vehicle Count: With a fleet size of over 170,000 vehicles,

Ryder has become a world leader in the trucking industry.

Location: Ryders high capital expenditure has increased the

total number of facilities within the US to 537. These

locations have increased the overall convenience and

accessibility for current and potential customers.84%

8%6%

2% 0%

Geographic Segments

US

Canada

Europe

Mexico

Asia

ECONOMIC MOAT


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Fall 2013


Peer Group Identification Target Price

Knight Transportation (KNX)

Provides asset-based dry van truckload,

temperature-controlled truckload, and dedicated

truckload services

Old Dominion Freight (ODFL) Provides logistics services, including ground and air

expedited transportation, supply chain consulting,

transportation management, truckload brokerage,

container delivery, and warehousing services

Werner Enterprises (WERN)

Engages primarily in hauling truckload shipments

of general commodities in both interstate and

intrastate commerce in the United States and

internationally

Peer Group Valuation: Using Consensus NTM EBITDA is equal to

$ 1510.95mm. The peer group valuation indicates an implied EV/EBITDA

of5.03x. These values yield an enterprise value of$7,605.13mm

Discounted Cash Flow: The WACC used is 7.02%. The industry analysis

indicates an implied EV/EBITDA of5.03x and a perpetuity growth rate of

2.0%. These values yield an EV of$6,965.4mm and $7,387.9mm

Cash ($73.4mm) is added and total debt ($3,914.4mm) is subtracted to

obtain the equity value. The equity value is divided by the shares

outstanding (52.3mm) to arrive at a target price. The price of the two

valuation approaches are averaged together to yield the price target

Target Price: $72.60Peer Analysis: Target Price = $71.97

Discounted Cash Flow Analysis: Target Price = $73.26

INDUSTRY REPORT

Trucking

The U.S. fleet market is estimated to include about 7.2 million vehicles, populated primarily by privately-owned

companies with their own fleet services. In recent years, these companies have been outsourcing their trucking

processes in order to achieve higher efficiency, to avoid fluctuation in fuel prices, and to put a stronger emphasis

on the quality of maintenance and safety programs. The revenues for the sector are forecasted to accelerate at a

CAGR of 3.3% for the next five years from 2012-2017, which equates to a value of $1,078.5 billion by the end of

2017. However, large carriers have begun to focus more on asset optimization and client profitability due to the

YOY decrease in volumes caused by the clients tighter control over inventories. The industry is now undergoing an

increase in core pricing with an expected average increase of 1%-2% for most truckload carriers in 2013, followingan increase of 3%4% in 2012. EBITDA in 2Q 2013 for the group showed a 1.2% increase YOY.

Logistics spending in Ryders target markets is estimated to be over $3 trillion, where $250 billion is outsourced.

The industry is forecast to accelerate at a CAGR of 3.4% for the next five-years from 2012 - 2017, which will drive

the industry to a value of $1,313.2 billion by the end of 2017. Disruptions such as Hurricane Sandy, have caused

companies to put a greater focus on risk management of their supply chains. As supply chains continue to become

more complicated, the demand for expert supply chain providers will grow.

Diesel Fuel vs. Natural Gas

Diesel fuel is the second largest cost for carriers, and with the increasing spread between diesel fuel and natural

gas prices; fleet owners are starting to consider converting to natural gas vehicles. According to the Department of

Energy, the average price for diesel fuel YTD is about $3.91 per gallon versus natural gass $2.14 per gallon, or an

equivalent $2.39 per gallon since natural gas is less efficient than diesel. Diesel fuel prices increased over the first

11 weeks of 2013, but began trending lower. Ryder System Inc. is participating in a $38.7 billion public-private

partnership with San Bernardino Associated Governments (SANBAG) to launch a heavy-duty natural gas truck

rental and leasing operation in Southern California. It is also overhauling three maintenance facilities in the area to

support the natural gas initiative. The program will replace 1.5 million gallons of diesel fuel annually with natural

gas. As of mid-July 2013, the company had over 300 natural gas vehicles in service.


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Fall 2013


FINANCIAL ANALYSIS

Sales:

Sales have been growing at a CAGR of 5.92% from

$4.89 billion in 2009 to $6.25 billion in 2012. The

consensus estimate is for Ryder to grow sales at a 3.49%

CAGR in the next 3 years ($6.44 billion for 2013, $6.73

billion in 2014, and $7.16 billion in 2015). In Q2 FY

2013, Ryder reported sales of $1.6 billion, a YOY gain of

3%. Ryders sales have been driven by organic growth

in the SCS business, increases in full services leasing,

and increases to the core rates.

The SCS segment has grown at an 18% CAGR since 2009,

and is expected to continue growing at 5%-6% per year.

In Q2 FY 2013, the SCS segment reported a sales

increase of 4.7% YOY, driven by strong dedicated

demand in each sub segment. The industrials (22%

growth YOY) and CPG Logistics (5% growth YOY) were the main drivers that contributed to top line growth. Sales

growth in this segment will continue to benefit from new outsourcing opportunities, and trucking regulations.

The FMS segment has grown at a 5.4% CAGR since 2009, and is expected to continue growing at a 3%-4% growth

rate per year. In Q2 FY 2013, the FMS segment reported a sales increase of 2% YOY, driven by a 3.6% increase in

Full Service Lease revenues. Sales in the FMS will continue to benefit from rising core rates, increasing popularity

of natural gas vehicles, and capitalization on old and new contracts.

Margins Analysis:

Ryders margins have remained relatively consistent over the

past 4 years after decreasing significantly during the financial

crisis. Gross margin has remained within 1%-2% of 20% over

that time period. EBITDA margins have fluctuated between

22%-24% over the same time period. Net income margin has

almost tripled since 2009, expanding from 1.3% to 3.7%.

Management expects the FY 2013 margin to expand toward

pre-recession levels in both segments. The FMS segment is

expected to post full-year, double-digit margins for the first

time since 2008. The SCS segment is expected expand margins

through top line growth driven by new services specifically within its industrials and CPG logistics sub-segments.

Ryders consistent margins are attributed to the companys commitment to ongoing maintenance initiatives and to

managements strong control on the companys cost structure. The net income margin has especially benefited

from these initiatives as well as from decreased benefits spending, and lower fuel cost. Ryders overall margins are

expected expand towards pre-recession levels due to the by growth in its leasing environment, benefits from fleet

replacements, improving residual values, new products and services, and cost management.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2009 2010 2011 2012

Segment Sales

2009 2010 2011 2012 LTM

Margins Analysis

NI EBITDA COGS


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Fall 2013


Earnings:

Ryder has beaten quarterly earnings estimates for the last 14 quarters by an average of 9.12%. From 2009 to 2012,

EPS has grown at a 16.49% CAGR from $1.51 per share to $2.78 per share. Consensus estimates that Ryders EPS

will grow at a 22.59% CAGR: $4.84 for 2013, $5.497 in 2014, and $6.287 in 2015. EPS has been able to outpace the

companys sales growth because of cost saving initiatives and stronger leasing outlook. In the Q2 FY 2013, Ryder

reported an EPS of $1.25, up 15% YOY driven by the improved performance of both segments. FMS earnings were

up 16% YOY due to higher utilization and increased pricing, and SCS earnings increased 8% YOY due to lower

benefits costs and increases in new business.

Ratio/ Profitability Analysis:

Historically Ryders profitability ratios have remained

steady since the financial crisis. Return on Assets has

grown from 3.4% in 2009 to 3.7% in 2012. Return on

Invested Capital has increased from 5.4% in 2009 to 5.8%

in 2012. The most significant change is in Return on

Equity, where Ryder has increased its ROE from 6.5% in2009 to 15.2% in 2012. Currently Ryder has a lower ROA

(8.8%) and ROIC (12.1%) versus its peer groups median.

However, Ryders ROE is much higher than its comps who

had an ROE of 13.5% compared to the 15.2% of Ryder.

Dividend

The current dividend yield is 2.2% and the payment has increased in 9 quarterly payments of $.02 to $.03 since

2005. In the past year, the yield has decreased from 2.8% to 2.2% because Ryder s price has appreciated at a

higher rate than the incremental increases of dividend payment. The current dividend payout ratio is 27.6%, a YOY

decrease of 1.6%, due to higher level of capital expenditure. However, management is still committed to increasing

its dividend by 8%-10% each year.

Balance Sheet

Liquidity

Since 2009, Ryders current ratio has remained steady around 1.0x, and net working capital is currently at $-134.3

million. Ryders liquidity ratios are in line with the rest of the industry and to its pre-recession history. Ryder

compensates for these low liquidity levels through a trades receivable purchase and sales program where the

proceeds are limited to $175 million. The company also has a $900 million global revolving credit facility to finance

the networking capital.

Debt: **For maturity schedule, please check attachments**

Ryder maintains high leverage ratios in order to acquire and service its large fleet. The company has maintained a

stable credit rating of BBB from Standard and Poors. Currently Ryder has $3,914.41 million in total debt

outstanding, of which 73.7% is on a fixed rate and 26.3% is on a floating rate. Ryder also has a maturity wall in

2016, when about $1,796 million is due. Of the amount due in 2016, about $900 million is part of a global revolving

credit. The company must maintain a ratio of debt to consolidated network of 300% or less in order to maintain

this funding; as of the end of 2012 that ratio was listed at 180% with $483 million still available. Ryders debt to

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2009 2010 2011 2012 LTM

Profitability Ratio

ROA

ROC

ROE


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Fall 2013


1.5

2

2.5

3

3.5

4

$-

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

2009 2010 2011 2012 LTM

Interest Coverage

EBIT INT EXP TIE

equity has is substantially higher than its peers at 2.50x, which is

a substantial increase from the 2009s 1.92x. However, Ryders

interest coverage ratio in the same time period has grown from

2.4x to 3.6x. As a highly leverage company, it is important that

Ryder can generate enough operating income to cover its interest

expense. Management also expects to lower the companys totaldebt, as interest rates begin to increase.

Inventory/Fleet size:

Ryders fleet can be separated into two FMSs sub-segments, full service leasing and commercial leasing. Currently

the fleet count for full service lease vehicles is at 120,300, a 1.7% decrease from the 2012 count of 121,600

vehicles. In the commercial rental segment, the 2013 count is 38,000 vehicles, a 7.54% decrease from 2012s

41,100 count. Ryder has about 9,600 vehicles available for sale and has already sold 6,000 units YTD; this

represents Ryders commitment to the replacement of older units to decrease average age and maintenance costs.

Ryder has utilized the lower interest rate environment to acquire a younger fleet. The average age of the fleet hasdecreased from 56 month in 2011 to 47 months in 2013, and is expected to decrease to 40-42 months in 2014.

Capital Expenditure:

Ryder has utilized the low interest environment to expand its capital

expenditures on new vehicles and capacity expansion, specifically the full

service lease and commercial rental sub-segments. Ryder aggressively

increased capital expenditure from $651.95 million in 2009 to a historical

high of $2.133 billion in 2012. Capital expenditures are expected to reach

$1.8065 billion by FY 2013 year end. This estimate is a 15.3% decrease

from the 2012 historical high and is in line with managements

expectation to decrease capital expenditure to $1.6 -1.75 billion in 2014

Pension Liabilities:

In 2012 and 2011, Ryder accumulated pension equity charges of $645 million and $595 million, respectively, due to

the impact of a lower discount rate that underfunded the defined benefit plans. These costs have been a drag

factor for the operations of FY2013, since Ryder has to pay out the difference of the underperforming funds. Ryder

has frozen and restructured most of these funds, so the charges will not be recurring. The completion of these

payments will free up cash in 2014 allowing for possible shareholder returns or capital expenditure.

Cash Flow:

Ryder cash flow from operation (CFFO) has been increasing at CAGR of 4% since FY2009 where CFFO FY 2012 was

$1,152.28 million and $2,007.83 million LTM. However, Ryder has generated increasingly negative free cash flow

(FCF); where in FY2012 FCF was $-980.95 million and in the LTM, $-1,564.36 million. CCFO/Capex has decreased

from 1.51x in 2009 to .54x 2012 and CFFO/ Total Liabilities has decreased from 20.38x to 16.82x in the same period.

These ratios show that FCF has been trending downward due to increasing capital expenditures and total debt.

Managements commitment to decreasing both capital expenditure and total debt will help FCF trend upward.

2009 2010 2011 2012 2013E 2014E

Capex


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Fall 2013


VALUATION

Undervaluation

The growth of the trucking industry has historically grown at the same rate GDP growth, and therefore is highly

reactive to macroeconomic trends and events. Ryder is more sensitive to these events due to its status as a highly

levered and capital intensive company. In the past six months recent events such as the Syrian Crisis, thegovernment shutdown, and fears of tapering have led to higher levels of economic uncertainty. This uncertainty

has increased the risk of Ryders operations and resulted in compression ofRyders stock price and trading

multiples. Over the past six months the stock price has fluctuated as much as 16% based on news releases, when

measured against these events.

Based on a 3-year trend, Ryder consistently trades at a 47.64% discount to the S & P Trucking Index based on

EV/EBITDA and 37.74% discount based on P/E versus the index. Currently, Ryder is trading at a 49.57% discount

based on EV/EBITDA and a 46.77% discount based on P/E versus the index. Ryder has consistently traded below its

peer group based on the P/E and EV/EBITDA multiples. Ryder on average trades at a 27.61% discount based on the

P/E multiple and a 36.82% based on the EV/EBITDA multiple against their peer group. However, the company is

currently trading at a 35.38% discount based on P/E and a 38.39% discount based on EV/EBITDA due to the

reasons mentioned. When compared to its historical 3-year median, Ryder is currently trading at 8.38% premium

on an EV/EBITDA basis and a 2.5% discount based on P/E.

Relative Multiple Comparison

The companies used in the relative valuation are Knight Transportation (KNX) Old Dominion Freight Lines Inc.

(ODFL), and Werner Enterprises Inc. (WERN).The peer group includes companies that operate in the same

segments as Ryder (FMS and SMS Supply), similar size/market cap, and similar geographic footprint. Ryder

historically trades at a 36.8% discount to the peer group 3 year average on an EV/EBITDA. However, Ryder is

currently trading at a 39.5% discount to the peer groups average EV/EBITDA of 7.97x due to reasons stated above.

Therefore the implied EV/EBITDA multiple that Ryder should be trading at now is 5.03x. Using the 5.03x implied

EV/EBITDA and consensus NTM EBITDA of $1,510.95 million yields an enterprise value of $7,605.13

million. Adding back $73.4 million in cash, subtracting out $3,914 in total debt, and dividing by the 52.3 million

shares outstanding yields a price target of $71.97.


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Fall 2013


Discounted Cash Flow

Assumptions

The 7 year sales growth at a CAGR of 3.6% is derived from the expected growth of the overall trucking and

transportation services industry. Gross margin and EBITDA margin are expected to grow due to the decrease in

maintenance cost created from Ryders younger fleet, growing natural gas fleet, and commitment to cost cutting

initiative. Depreciation historically have been around 15% of sales, however this ratio will grow as Ryders begins

assessing depreciation expenses to its increasingly younger fleet. Assumptions that capital expenditure and long

term debt will decreased is based on the expectation that management will decrease capital expenditure in order

to meet its target debt to equity and avoid rising interest rates. Management has recently decreased Ryders total

debt to equity expects to maintain leverage ratio between 2.25x and 2.75x for the next few years.

Weighted Average Cost of Capital

The WACC is calculated to be 7.02% using the 6 year average weights of 46% for Equity and 54% for Debt. Cost of

capital of 12.69% is calculated using CAPM, with a risk free rate of 2.58 %, a market risk premium is 9.93%, and

using a beta of 1.457. The cost of debt of 2.26% is calculated the using the pre-tax weighted cost of ST debtor .0224%, the pre-tax weighted cost of LT debt of 2.40%, and the effective tax rate of 34.82%.

Price Target

For the EV/EBITDA method, the implied EV/EBITDA of 5.03x is derived from the relative valuation. This method

yields a discounted terminal value of $6,683.1mm, an enterprise value of $6,965.4mm, and a price target of $69.24

per share. For the growing perpetuity method, a 2.0% growing perpetuity is used because the trucking industry in

the US has historically has consistently grown at the same rate as US GDP. This method yields a discounted

terminal value of $6,105.6mm, an enterprise value of $7,387.9mm, and a price target of $77.31 per share. The

average of these two values yields a price target of $73.26.

APPENDIX

DCF

WACC: 7.5%

EM: $69.24

GM: $77.31

Price $ 73.26

EV/EBITDA

EV/EBITDA: 5.03x

EBITDA: $1510.95 mm

Price: $71.97

Target Price

$ 72.60


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Fall 2013


APPENDIX

R benched marked vs s Peers 3 year EV/EBITDA

R benched marked vs S&P 400 Trucking 3 year EV/EBITDA

0.50x

0.55x

0.60x

0.65x

0.70x

Ryder System, Inc. (NYSE:R)/Index: KNX, WERN, ODFL - TEV/EBITDA

0.42x

0.47x

0.52x

0.57x

0.62x

Ryder System, Inc. (NYSE:R)/S&P 400 Trucking (Sub Ind) Index - TEV/EBITDA

Ryder System, Inc. (NYSE:R)/S&P 400 Trucking (Sub Ind) Index - TEV/EBITDA: Median


10/14

Fall 2013


R 3 year EV/EBITDA

DCF Financial Projection Summary

3.50x

3.70x

3.90x

4.10x

4.30x

4.50x

4.70x

4.90x

5.10x

5.30x

5.50x

Ryder System, Inc. (NYSE:R) - TEV/EBITDA


11/14

Fall 2013


DCF FCF Projection Summary

DCF Sensitivity Analysis: GM Method

DCF Sensitivity Analysis: EM Method


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Fall 2013


Fleet Count

Average Fleet Age


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Fall 2013


Historical D/E

Maturity Schedule

$-

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

$1,800.00

$2,000.00

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Debt Distribution

Interest

Revolver

Term

Bond


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Fall 2013


DISCLAIMERThis report is prepared strictly for educational purposes and should not be used as an actual

investment guide. The forward looking statements contained within are simply the authors

opinions. The writer does not own any of the Ryder Systems, Inc. stock.

TUIA STATEMENT

Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business,

for his tireless dedication to educating students in real-world principles of economics and

business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of

students have exposure to a challenging, practical learning experience. Managed by Fox School of

Business graduate and undergraduate students with oversight from its Board of Directors, the WCD

Owl Funds goals are threefold:

Provide students with hands-on investment management experience

Enable students to work in a team-based setting in consultation with investmentprofessionals.

Connect student participants with nationally recognized money managers and financial

institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and

auditing costs and partial scholarships for student participants.

ryder initiating report

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