Ryder Systems Inc. (R.N) is a solid dividend performer, but has weak cashflow and a neutral balance sheet due to its business model. Nonetheless, when measured against EPS and overall revenue fundamentals, the comapny seems solid. With strong dividend performance, and revenue fundamentals, I rate this a Buy.
Ryder System, Inc. (Ryder) is a provider of transportation and supply chain management solutions, with operations in three key business segments:
- Fleet Management Solutions (FMS). Their FMS offering is “comprised of longer-term full service leasing and contract maintenance services; shorter-term commercial truck rental; flexible maintenance services; and value-added fleet support services such as insurance, vehicle administration and fuel services.” Moreover, Ryder makes use of old inventory (trucks, tractors, and trailers) through sales network, providing old inventory for sale through their used vehicle sales program.
- Dedicated Transportation Solutions (DTS). The DTS unit provides a dedicated transportation solution vis-a-vis full service leases with drivers, additional services (such as scheduling, safety, and regulatory compliance), and equipment, maintenance, and general administrative services.
- Supply Chain Solutions (SCS). SCS provides supply chain management and general logistics services.
Ryder’s cash flow is terrible, and their current ratio does not meet the minimum threshold I look for of 1.50; their F2015 Current Ratio is 0.65. Moreover, the firm carries a lot of debt, evidenced by their overall financial strength, below. Overall Total Liabilities to Equity, and Net Debt to Equity, are exceedingly greater than 1.00. I differentiate between Total Liabilities and Net Debt, the former including all liabilities on the balance sheet, such as debt, leases, accounts payable, etc., and the latter being pure debt, e.g. debt owed to creditors. On the flip-side of this, Debt to Tangible Assets is consistently less than 1.00, which means that overall the tangible assets exceed total debt; in a sell-off situation, according to the balance sheet, Ryder would still be in an okay position (albeit barely).
This weak financial condition had me worried at first, but when you peel back the layers it is not as bad as it seems. For one, the current ratio has spiked in F2015 due to a large amount of long term debt coming due. Second, the nature of the business is that Ryder has long term liabilities vis-a-vis long term leases with suppliers. They take the products from long term leases, and in turn lease those products back to their customers. This is important: they are rotating debt to pay for long term revenue generating property, plant, and equipment (PPE), AKA trucks, tractors, and trailers. Moreover, revenue generating PPE are classified under capital leases; this makes sense, as it reduces the risk of Ryder owning the equipment outright. Within this context, the high debt levels are not concerning, as it is one of their core operating strategies: capital leases, which they then lease out through their various business segments, and finally sell through their FMS used vehicle sales program.
Reviewing key operating metrics, if we look forward from the last financial crisis, revenue, gross, operating, and net profit margins have all been on an upward trend:
This is reassuring: increasing revenue and increasing margins means that top line income is going up, and bottom line income is going up faster vis-a-vis increased margins. From a dividend perspective, this means that EPS as a whole is going up as well. All things being equal, even with a consistent dividend payout ratio, if EPS is rising, the dividend rises with it. But more on that in the dividend analysis below.
If we look at our key criteria, six out of seven tests pass:
|Strong financial condition||Current Ratio||0.65||1.50||NO|
|Earnings Stability||Number of most recent years of positive EPS||10.00||3.00||YES|
|Earnings Stability||Number of consecutive years of negative EPS||–||1.00||YES|
|Dividend Growth||Compound Annual Dividend Growth||0.08||0.02||YES|
|Share Price Growth||Compound Annual Share Price Growth||0.03||0.03||YES|
|EPS Growth||Compound Annual EPS Growth||0.06||0.03||YES|
|Moderate P/E Ratio||P/E||9.84||15.00||YES|
|Moderate P/BV Ratio||P/BV||1.51||1.50|
|Moderate P/E*P/BV Ratio||P/E * P/BV||14.86||22.50|
Ryder’s dividend has been stellar. While it yields a relatively low 2.68% based on the Oct 3, 2016, market price of $65.58, its compound annual dividend growth rate is 8.44% since F2005. Moreover, the payout ratio based on EPS has been consistently under 40%, breaking that limit only during the financial crisis when EPS was significantly hit due to a drop in revenue during that period.
I would normally be concerned that the free cash flow is "wavy", but taken into context against their business model, and how they operate, this does not concern me for Ryder. In this case, the measurement against EPS is appropriate.
Share price is the weakest of our seven criteria metrics, eking out a measly 3.01% over our threshold of 3.00%. The biggest drop has been F2014-F2015, which coincides with the valuation returning to normal levels: in F2014 the P/E × P/BV was a staggering 60, but in F015 it has dropped to the sub-20 level.
As of October 3, 2016, using a mean consensus F2016 EPS estimate of $5.97, the valuation gives us a Graham number of 20.067, indicating that the company is undervalued at the moment.
|Mean Forward EPS||$5.97|
|Historic mean P/BV||1.83|
|P/E × P/BV||20.067|
I like companies such as Ryder, mainly because I love big machinery, and easy to understand companies. One could look at Ryder and say that there is a significant amount of financial engineering to balance leases, etc., but it works in their favour. When I have some free cash, I will likely pick up some shares of this company in the near future.