We are downgrading our long-term recommendation on Ryder System Inc. (R), the world's largest provider of integrated logistics and transportation solutions, to Neutral from Outperform. Currently, the stock has a Zacks #3 Rank (Hold).
Although third quarter earnings beat the Zacks Consensus Estimate by 11 cents, downsizing of customer fleets and high maintenance cost of the aging fleet make us cautious on the stock.
Cash and cash equivalents at the end of the third quarter increased to $134.7 million from $98.5 million at the end of 2009. Total debt declined by $32.1 million from year-end 2009.
However, debt-to-equity ratio increased to 180% from 175% at the end of fourth quarter 2009 and free cash flow plunged to $153 million from $462.3 million in the year-ago quarter, primarily due to increased vehicle spending.
Despite uncertainties related to overall economic recovery, improved transportation conditions are expected to benefit Ryder in the near term. Improved demand, lower freight capacity and greater usage of rental trucks due to economic uncertainty and the higher cost of new trucks are likely to enhance operating results going forward.
Additionally, Ryder remains committed to its shareholders via dividends and share repurchase. Ryder pays an annual dividend of $1.08 per share, representing a dividend yield of 2.5%. This dividend is higher than its competitor Con-Way Inc.’s (CNW) dividend yield of 1.2%.
Moreover, Ryder continues to yield returns from its existing fleet. The company’s continued investments in vehicles and rental fleets will result in incremental revenues and cash flows over a three-to-ten year term. Ryder’s investments in technology (mainframe, shop maintenance and data warehouse systems) are also expected to result in cost and productivity benefits in future years.
However, we believe that going forward the results of Ryder will be restricted by customer fleet reduction, higher maintenance cost, various regulatory pressures, and increased driver costs in a competitive market. Additionally, Ryder faces a prolonged freight recession on its lease business, which might hurt near-term earnings.