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The automotive industry is experiencing a strong recovery as the sales volumes begin to show remarkable improvement over previous months. Specifically, the trucking industry in the US is reasserting its position as perhaps the most important component of vehicle manufacturers' product stream. In this situation, complementary businesses which include transportation in their services portfolio are also getting a considerable splash. In this transportation services industry, Ryder System Inc. (NYSE:R) is being evaluated as a prospective investment opportunity for equity investors as the company appears to be demonstrating a decent performance. Most of the large players in the automotive industry are, in fact, clients of this transportation services company.

The business activities of Ryder can be subdivided into three segments. These business segments include Fleet Management Solutions (NYSE:FMS), Supply Chain Solutions (NYSE:SCS) and Dedicated Contract Carriage (DCC). The FMS segment provides full service leasing, contract maintenance and truck rental services. These operations are primarily based in US, UK and Canada. The SCS segment provides distribution and transportation services in North America and Asia. Lastly, the DCC segment is based on dedicated transportation solutions in US as the company provides vehicles and drivers to a variety of businesses. The description of these business segments clearly suggests integration with the performance of the automotive industry and the overall activity in the economy. The supply chain solutions segment also allows for regional diversification in the company's portfolio of services.

Recent Stock Price Trends

Since the beginning of FY13, the stock price of Ryder has shown an increase of 22.4%. According to an analysis conducted by Barron's, the improvement in automotive and housing industries has uplifted the performance of the major clients of the company. These clients include General Motors (NYSE:GM), Toyota Motor Corp. (NYSE:TM) and Mohawk Industries Inc. (NYSE:MHK). Analysts suggested an upside potential of approximately 15% if the company can improve its margins to previous levels.

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Source: YCharts

The chart above illustrates the stock prices of Ryder Systems and two of its competitors, Avis Budget Group Inc. (NASDAQ:CAR) and Hertz Global Holdings Inc. (NYSE:HTZ) in the past one year. The stock prices of these two companies have clearly outperformed Ryder's price appreciation of 52.12% as the demonstrated an increase of 135.7% and 112.3%, respectively. At the same time, it must be noted that these stock prices are not reflecting the financial performance of these three companies in the previous years.

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Source: YCharts

The above chart illustrates the diluted EPS (TTM) of the three companies since the beginning of FY10. The chart clearly shows that in terms of per share profits, the company has outperformed its competitors by showing a substantial growth in earnings. This outperformance however, has not been priced by the market. This introduces the possibility of a strong upside for the investors in the future.

Growth and Comparative Valuation

We have established that there is a deviation in the performance of Ryder as compared to its competitor which has not been properly reflected in the stock price of the company. The company's growth prospects in the coming future also play a vital role in this evaluation of the company.

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Data Source: Morningstar

The above chart illustrates the growth in company's total assets over the last four years and the ROA achieved by the company. We see a periodic improvement in total assets as they have increased from $6.7 billion to a total of $7.62 billion. Similarly, ROA has improved from 0.96 to 2.64.

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Data Source: Morningstar

The above table attempts to evaluate the valuation of the company as compared to its competitors and the overall industry using key valuation metrics. The P/E ratio of the company is remarkably below the average P/E of competitors and the industry average. A similar degree of undervaluation is evident in the P/B and P/S comparison. This undervaluation, coupled with the stronger performance of the company as compared to its competitors and the organic growth in key segments of the business, allows for a strong upside potential for investors.

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Source: YCharts

The above chart shows the PEG ratio of the company since the beginning of FY11. The chart attempts to capture the undervaluation of the company by incorporating the growth aspects. We see that the market has started recognizing the potential of the company causing an increase in the PEG ratio of the company over these two years.

Conclusion

The industry is in full support of Ryder's future prospects as the aspects of the economy which are vital to the performance of the company, are improving. In this improvement, the market has also started realizing the potential of undervalued stocks such as these. However, the full potential of the company has not been realized as yet. Therefore, I propose a buy recommendation for investors as the stock is likely to demonstrate substantial appreciation. This appreciation will come from growth in key segments of the company which will contribute to the overall performance. The undervaluation of the company will serve as a key driver of the increase in stock price over the coming years.

Source: Ryder System, Inc. Has Unrealized Potential