Investors are making a pretty big statement about Ryder System (R +3.79%). Simply put, given the nearly 40% decline in its stock price since the start of 2018, Wall Street appear unimpressed with the truck rental and logistics company's prospects. The thing is, over that span, Ryder's trailing 12-month revenues have actually been trending higher. And while its earnings fell significantly in 2018, that was largely due to a major one-time benefit it booked in 2017 due to the tax code overhaul. Pull that impact out, and Ryder's earnings were up 28% in 2018. They rose another 16% year over year in the first quarter of 2019, as well. Are investors missing something here? It looks like they may be.
Waiting for the downturn
Trucking tends to be a highly cyclical industry. That makes sense: Trucks move goods from where they are made or enter a country to where they are used or sold to end customers. If economic activity is declining, then it's likely that fewer trucks will be making deliveries because the products simply aren't needed. Such downturns can happen pretty quickly as well, leading to swift and material swings on the top and bottom lines for trucking companies.
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With 90% of its revenues coming from North America, Ryder's health is tied closely to the continent's broader economy. Since the current U.S. expansion is getting a little long in the tooth, it makes sense that investors would be a bit worried about the company's outlook -- especially as headwinds including the U.S./China trade war continue to mount. In fact, looking back to the Great Recession, it appears that there's a pretty good reason to worry. Over that two year span, the company's revenues fell roughly 20% and earnings declined around 70%. The recent slump in Ryder's stock price suggests that investors expect the next recession to begin soon, and think it could hit the trucker pretty hard.
R Revenue (TTM) data by YCharts
But there's another side to this story. For example, although the last recession hurt Ryder, its results quickly bounced back. And when you look at the company's business today, it appears to be well prepared for a downturn.
An interesting model
The company breaks its business down into three segments: fleet management solutions (roughly 60% of revenues); supply chain solutions (25%); and dedicated transportation solutions (the rest). It basically covers everything from operating trucks on behalf of others to route scheduling to warehousing (including serving giant companies such as CVS and Anheuser-Busch InBev). All in all, management believes it has a roughly $1.3 trillion addressable market. And it estimates it only currently serves around 1% of that market.
That's an interesting figure, because Ryder's management also believes there are a number of factors (such as driver shortages, and technological advances like lower-emission vehicles) that favor increased outsourcing in the trucking space. With such a broad portfolio of offerings, it can step in to help just about anyone. So while the company's revenues may decline during a downturn, an economic rough patch could actually be a great time for it to expand its reach. Such growth might come from buying weaker competitors (it acquired six companies between 2007 and 2009) or from acquiring new customers that conclude that handling their own trucking needs isn't worth the cost and effort.
Ryder is in pretty good shape to execute such an expansion strategy in a downturn. Its debt-to-equity ratio is around 2.2, and its debt-to-EBITDA ratio is around 3.1. Both are higher than they were through the 2007 to 2009 recession, but not outlandishly high. Perhaps more important, the company's debt is investment-grade rated and well within key debt covenants. Based on that, it doesn't appear that access to capital will be a problem. Given the condition of its balance sheet, Ryder should both be able to handle a downturn and take advantage of any opportunities it creates.
But here's the more important piece. The company's business, as management has been trying to highlight lately, is built on long-term contracts. Today, roughly 86% of revenues are tied to contracts with average lengths of between five and seven years. Generally, recessions are much shorter than the company's normal contract agreement. So Ryder might take a hit during a recession, but given that so much of its revenue is contracted, the hit probably won't be as bad as investors now appear to expect. And, with those customers locked in, the company's rebound should track pretty closely with the subsequent economic uptick. In short, Ryder is likely to come out of the next recession a better company.
R Dividend Yield (TTM) data by YCharts
An attractive dividend
Ryder's stock price decline, meanwhile, has pushed its dividend yield up above 4% -- a level it hasn't hit since the last recession. However, the company has increased its dividend annually for 14 consecutive years, and the payout ratio is a reasonable 40% or so. With a business and business model built to survive economic downturns, that's not surprising. But it is important to remember as you look at the recent steep share price drop.
To be sure, a recession would hurt Ryder's short-term results, but it appears unlikely that one would completely derail the trucker's business. In fact, a downturn would probably benefit the company over the long run. So if you are an income-focused investor who can handle some near-term uncertainty, this stock's tumble could be a good opportunity for you to pick it up at a high yield.
