Ryder Beats Top and Bottom Lines

Ryder System Inc. (R - Analyst Report), the world's largest provider of integrated logistics and transportation solutions, has reported adjusted earnings of 59 cents that surpassed the Zacks Consensus Estimate by a penny and increased 16% from 51 cents in the year-ago quarter. Adjusted quarterly net income also increased 16% year over year to $30.6 million from $26.3 million in the year-ago period.

The company achieved double-digit growth backed by the acquisition gains in Fleet Management Solutions, higher vehicle sales as well as strong organic growth in commercial rental and Supply Chain Solutions.

The company registered revenue of $1,536.3 million in the first quarter, reflecting an 8% year-over-year increase. The quarter’s revenue also outpaced the Zacks Consensus Estimate of $1,516 million. The pass-through of higher fuel costs to customers and increased commercial rental revenues led to the robust growth. Operating revenue (total revenue less Fleet Management Solutions fuel and all subcontracted transportation) increased 9% year over year to $1,228.9 million, driven by acquisitions and organic growth.

Segment Results

Fleet Management Solutions: Total revenue climbed 9% year over year to $1,071.4 million on higher Commercial Rental and Fuel Services revenues that increased 26% and 6%, respectively. The growth in Commercial Rental was backed by higher global demand and pricing. Fuels Services’ revenues increased on higher fuel prices passed through to customers. On a year-over-year basis, Contract Related Maintenance revenue grew 20% and operating revenue (revenue excluding fuel) increased 10%. Other revenue registered a modest growth of 1% and Full Service Lease revenue increased 5%. Contractual revenue climbed 6%.

Supply Chain Solutions: Total revenue (including dedicated contract carriage service revenues) leaped 7% to $571.9 million in the first quarter from $535.8 million in the year-ago quarter. Operating revenue (excluding subcontracted transportation) also grew 7% year over year to $ 484.6 million. The year-over-year growth was primarily based on higher volumes in automotive, retail and consumer packaged goods and dedicated contract carriage. Further, revenues were also aided by the acquisition of Scully Companies, Inc. during last year in January.

Liquidity and Cash Flow

Ryder System ended the quarter with cash and cash equivalents of $113.6 million compared with $104.6 million at year-end 2011. Cash from operations was $186 million compared with $218 million in the year-ago quarter. Given heavy investments in vehicles, free cash flow was a negative $175 million versus a negative $9.6 million at year-end 2011.

Long-term debt at the end of the first quarter was $3,006.3 million compared with $3,107.8 million at the end of fiscal 2011 due to acquisitions and investments in vehicles. Debt-to-equity ratio was 262% compared with 257% at year-end 2011.

Guidance

Management expects second quarter 2012 earnings in the range of $1.07 to $1.12 per share. For FY12, management expects earnings in the range of $4.02 to $4.12 per share.

Recommendation

We believe that Ryder System remains well positioned to benefit from organic growth and acquisitions, as well as a favorable lease rate environment. Increased commercial rental and used vehicle sales will remain the key areas of volume expansion. Higher fuel surcharges, given surging fuel prices will also aid revenue growth in the near term. However, heavy capital expenditures, a distressed cash position , currency headwinds and competition from peers like Con-Way Inc. (CNW - Snapshot Report), could limit the near-term growth for the company. Hence, we have a Neutral recommendation on the stock with a target price of $54, based on 13.4x our earnings estimate for 2012.

We are currently maintaining our long-term Neutral recommendation supported by a Zacks #3 Rank (Hold).