Ryder System: Ample Strength to Ride in the Right Direction

| About: Ryder System, (R)

Ryder System, Inc.(R) one of the leading transportation and supply chain management companies in the U.S., released its third quarter earnings before the market opened. The company reported earnings of 76 cents per share from continuing operations, which beat the Zacks Consensus Estimate by 11 cents and were 25 cents or 49% above the year-ago quarter.

Rise in earnings was mainly driven by the company's Fleet Management Solutions (FMS) division. Furthermore, a lower-than-anticipated tax rate in the third quarter helped EPS to show an improved performance of 4 cents, which were partially offset by higher maintenance costs of aging fleets and customer fleet reductions.

Total revenues for the third quarter were $1.32 billion, up 5% year over year, and were in line with the Zacks Consensus Estimate. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) jumped 4% in the current quarter to $1.07 billion as compared with the year-ago quarter.

Segmental Revenue

Fleet Management Solutions (FMS) business is one of the profitable divisions of the company, having reported revenues of $948.9 million, up 4% compared to the third quarter 2009. Results were driven primarily by better commercial rental performance and improved used vehicle sales results. Operating revenue increased by 3% to $733.9 million compared with the year-ago quarter.

Contractual revenue (includes full service lease and contract maintenance) for the current quarter was $527.6 million, down 3% as compared with the year-ago quarter, mainly due to customer fleet downsizing. Commercial rental revenue climbed 32% to $147.9 million due to increased demand in the global market and higher pricing. Rental power fleet utilization was 79% in the third quarter of 2010 as compared to 70.8% in the year-ago quarter.

Supply Chain Solutions (SCS) segment reported a 10% increase in revenue to $322.9 million in third quarter 2010, while Operating revenue (revenue excluding subcontracted transportation) climbed 5% to $258.5 million, which was mostly driven by improved automotive and high-tech volumes and a favorable foreign exchange rate, partially offset by contract rationalizations from the prior year.

Dedicated Contract Carriage (DCC) segment reported total revenue of $121.4 million, up 1%, while Operating revenue (revenue excluding subcontracted transportation) was $118.7 million, up 2% as compared to third quarter 2010 which was mainly supported by higher fuel costs.

Capital Expenditures, Cash Flow

Capital expenditures were $860.9 million, up 69%, while net capital expenditures (including proceeds from the sale of assets) from continuing operations were $732.9 million, up 131% as compared to the third quarter 2009. The prime objective of the company is to expand its commercial rental fleet by increasing its capital investment.

Operating cash flow was $804.2 million, up 4.6% while free cash flow was $153.0 million, down by $309.3 million compared to the year-ago quarter. Total cash generated (including proceeds from used vehicle sales) from continuing operations was $1.01 billion, compared with $970.8 million in the same period of 2009.

Our Analysis

With an improvement in market conditions, the company has ample balance sheet strength to support its expansion both organically and inorganically. Further, the company remains committed to return value to its shareholders via dividends and share repurchase.

Ryder System, Inc. currently retains a Zacks #3 Rank (short-term Hold rating).