Unlocking Shareholder Value: Why Ryder Could Be Your Next Long-Term Winner (NYSE:R)

If ifs and buts were candy and nuts, we would all have a merry Christmas.

introduction

In this article, I want to discuss a “what if” situation regarding a company that I haven’t covered since August. 12, 2022. This company is Ryder Systems, Inc. (NYSE:R)a transportation giant that has since delivered 58% returns.

At that time I called the company a “good dividend investment“, but decided against investing as my focus was on other transport companies and Ryder needed to prove itself.

After rejecting a takeover offer, the company found itself on a very uncertain path.

The good news is that Ryder is actually showing that its transition is going smoothly. This also explains its great performance. Although Ryder has lagged the S&P 500 (SP500) by almost 150 points over the past decade (233% versus 87%), has achieved a return of 164% over the last five years.

After almost two years, I will update my thesis and explain the “what if” situation based on recent developments, including the recent Analyst/Investor Day 2024.

If the company can execute on its growth plans, it could create significantly greater value for shareholders.

Since we have a lot to discuss, let’s get started right away!

The “new” Ryder is impressive

What is the Ryder System?

Even if you have read my articles in the past, after almost two years it can’t hurt to briefly discuss how this company makes its money.

Essentially, the company is a provider of outsourced logistics and transportation services. It offers a wide range of services.

To quote from the company’s 10-K filing (emphasis added):

• Fleet management solutions (“FMS”)offers full-service leasing, which includes our contracted maintenance offering, as well as commercial rental and maintenance services for trucks, tractors and trailers, primarily to customers in the United States (US) and Canada.
• Supply Chain Solutions (“SCS”)which provides fully integrated port-to-door logistics solutions including distribution management, dedicated transportation, transportation management, freight brokerage, e-commerce fulfillment, last mile delivery, contract packing and contract manufacturing in North America.
• Special transport solutions (“DTS”)that provides turnkey transportation solutions in the United States, including specialty vehicles, professional drivers, management and administrative support. Specialty transportation services provided as part of an operationally integrated, multi-service supply chain solution for SCS customers are primarily reported in the SCS business segment.

The company currently serves more than 40,000 commercial customers and generated revenue of nearly $12 billion last year.

In addition, the company has 760 truck maintenance locations and more than 300 distribution centers, giving it a competitive advantage that is difficult to replicate.

As I briefly mentioned earlier, over the past five years the company has focused on improving its growth strategy, which includes optimising its operations.

According to Investor/Analyst Day 2024, this was key to achieving key transformation milestones.

By reducing the residual value of leased vehicles and increasing lease prices, Ryder was able to reduce its dependence on the volatile used car market. This strategic shift resulted in more stable and predictable earnings and reduced maintenance costs by $100 million.

In addition, the company divested from underperforming regions, such as the United Kingdom, to focus on its core North American market.

As a result, Ryder’s comparable earnings more than doubled between 2018 and 2024 and return on equity improved from 13% in a “peak” environment to 16% in a “lower” environment. Last year, return on equity was 19%.

In addition, as we can see above, the supply chain and dedicated transportation segments, which now account for 60% of Ryder’s revenue, have experienced significant growth. This growth shift was accompanied by a 40% increase in operating cash flow to $2.4 billion.

To stay ahead in what has always been a highly competitive industry, the company continues to invest in technology and innovation.

Essentially, the company leverages its vast logistics network and technological improvements to provide end-to-end supply chain solutions, from e-commerce order fulfillment to last-mile delivery.

In a world where most companies are looking to leaner and outsource these tasks, Ryder is in the right place at the right time.

Speaking of a changing environment, the company also argues that the increasing complexity of supply chain management and the ongoing shortage of professional drivers and technicians will further increase demand for its outsourcing services. I agree.

In addition, 85% of its revenue is long-term contract revenue, which increases revenue transparency.

So what does this mean for shareholders?

There is room for juicy returns!

During the first quarter 2024 earnings call, the company noted that it expects significant long-term earnings growth despite the low point in the used car sales and rental market expected this year.

On an annualized basis, the company expects comparable earnings per share of $11.75 to $12.50 for 2024, up significantly from $5.95 in 2018. Last year, when economic conditions were better, earnings per share were $12.95.

While we “wait” for the economic recovery, the company has a healthy balance sheet and an investment grade credit rating of BBB+, just one notch below the A range.

The company uses this balance sheet for share buybacks and dividend growth.

• Over the past decade, the company’s annual dividend growth has averaged 8%. The most recent increase was 14.5% on July 13. Ryder shares currently yield 2.3%. These dividends have a payout ratio of 22%.
• Since 2021, the company has repurchased around 16% of its shares.

In the long term, we can expect this trend to continue, as Ryder targets high-single-digit annual revenue growth, and the company maintains this guidance from June 2024 onwards.

This is a good sign for the rating.

Currently, Ryder is trading at a blended P/E of just 9.9. This is not only below its long-term normalized P/E of 14.1, but also accompanies very positive analyst expectations.

Using the FactSet data in the chart above, analysts expect EPS growth of 17% in 2025 and 2026, following a possible decline of 8% in 2024.

The theoretical price target for the stock is therefore USD 229, which is 86% above the current price. The current price target is USD 142.

The big difference is mainly due to investors not yet being ready to bet on a recovery in the freight market. This creates opportunities for long-term investors who want to hold Ryder for at least 4-5 years.

While I don’t know what the next year or two will look like, I am confident that Ryder has a very bright future ahead of it if the company can execute on its growth plans.

The only reason I’m not investing in Ryder is because earlier this year I initiated a full position in Old Dominion Freight Line (ODFL), a less-than-truckload company. I also own three railroads.

Of course, investors need to be aware of the cyclical risks that Ryder presents. If the economy continues to deteriorate, we could see potential guidance cuts and a weaker share price.

Bring away

Ryder System, Inc. has demonstrated impressive growth and strategic transformation over the past few years, achieving key milestones and improving its financial stability.

By focusing on core North American markets, optimizing operations and leveraging technology, Ryder was able to double its comparable earnings and significantly improve its return on equity.

Despite economic uncertainties, the company’s healthy balance sheet, steady dividend growth and long-term revenue forecasts make it an attractive option for long-term investors.

Although economic risks remain, the company’s solid strategy and implementation could create significant added value for shareholders in the coming years.

For and against

• Great job: Ryder has returned 164% over the past five years, significantly outperforming the S&P 500.
• Strategic Transformation: The company’s shift to more predictable revenue streams through operational optimization and focusing on high-growth markets has paid off.
• Growth potential: Analysts forecast EPS growth of 17% for 2025 and 2026, which bodes well for the valuation.
• Sales transparency: 85% of Ryder’s revenue comes from long-term contracts that provide stable and predictable income.

Disadvantages:

• Cyclical risks: Ryder’s performance depends on the broader economic environment.
• Competition: The transport and logistics industry is highly competitive.
• Market volatility: Ryder’s dependence on the used truck market and the rental segment is associated with fluctuations in sales.