Ryder Continues To Invest Heavily

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About: Ryder System, Inc. (R)
by: Individual Trader
Summary

Capex spend continues to increase.

Free cash flow remains negative.

Liquidity and debt continue to rise.

Ryder System, Inc. (R) (the transportation and supply chain company) at present pays out just under a 4% dividend yield. The company has now raised its annual dividend for 10 years straight. What attracted us to this stock was its cheap valuation. Ryder System (apart from its low earnings multiple of 10.2) also has ultra-low book and sales multiples at present. Ryder presently has a reported price to sales ratio of 0.3 and a price to book ratio of 1.1. These numbers, along with that growing dividend, are evidence enough to continue researching here.

The long-term technical chart, though, does not look as convincing as the firm's dividend or valuation at present. As we can see below, shares topped out after a multi-year rally in early 2015. Since then, price has printed lower lows but also higher highs. The angle of the trend lines is very shallow, which means there is definitely the potential for a descending triangle pattern (bearish) to be played out here in the not too distant future. The January 2016 lows must hold to avoid this bearish pattern from playing out.

Many times, the financials and, especially, the dividend can give us some insights on whether a bullish pattern or bearish pattern is being played out. Therefore, let's see how both have been trending over the past 5 years to see if they are getting stronger or not.

Although the dividend increased by a whopping 17% in 2018, the 5-year average dividend growth rate per year comes in at just under 4% on average per year. Although not hectic, it certainly is above the rate of inflation, and we must also take into account the above-average yield on offer.

From an affordability standpoint, we can see that there is no adverse issue with respect to the earnings being covered by the dividend. Over the past four quarters, for example, earnings per share came in at $5.33, whereas $2.14 was paid out in dividends per share during the same time frame.

Earnings do not pay dividend though but rather cash does. However, when we view the firm's cash flow statement, we can see that operating cash flow has been totally consumed in recent years by rising capex costs. In fact, in the financing section of the cash flow statement, we can see that it has been debt which has paid the dividend over the past five years and not free cash flow, which incidentally has remained in negative territory over this time frame.

The crux of the issue is this. Although operating profit has increased by more than 80% over the past five years, its dollar amount increase is still a mere $282 million. Ryder's capex spend over the same time frame has increased by $1.15 billion. Yes, we have seen a good return on investment with respect to top-line growth, but as of yet, we are not seeing that sales growth drop down to the bottom line.

Existing investors should pay attention to some key metrics, which affect the stability of the dividend. First is the interest coverage ratio, which currently stands at 2.98. There is no problem taking on fresh debt as long as the income growth is there to meet the extra payments. As noted earlier, we need to see more bottom line growth. Second is the debt to equity ratio, which stands at 2.35. This number is calculated off interest-bearing debt. If we were to calculate the equity off the firm's total amount of liabilities, the number would be closer to 3.5. Again, it is the trend here, which is what should be focused on as, ultimately, these debts will need to be eventually paid back. Finally, the current ratio in the firm's latest quarter came in at 0.57. Liquidity is a very important aspect of the balance sheet. Again, the 0.57 number is the lowest print we have seen over the past decade.

Therefore, to sum up, although Ryder looks cheap at present, we would be concerned about how some of its key financials have been trending. Strong earnings growth is predicted over the next few years. In fact, 10 analysts who follow this stock have earmarked a price of $75+ going forward for Ryder. Let's see if it can deliver.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.