A weak used truck market is weighing on Ryder’s performance

It may be a strong trucking market by all accounts, but it isn’t a strong market for the sale of used trucks. On Thursday, Ryder chairman and CEO Robert Sanchez addressed that issue at a Miami conference, and so did the transport analysis group of Stifel Financial.

Sanchez, speaking at the Citi 2018 Industrials Conference in Miami, said a 2 ½ year decline in used truck pricing appears to have leveled off. That decline has weighed on the Ryder’s earnings, significant enough that Stifel led its section on used truck sales with the rhetorical question: “Used trucks–when’s the pain gonna stop?”

“There’s an oversupply of used trucks, and there aren’t enough buyers,” Sanchez said at the Citi conference.  But he said by the fourth quarter of 2017, prices had stopped sliding. As to whether there was an upturn, Sanchez said Ryder’s expectations are that prices “won’t pick up yet. We just have not seen it and we didn’t want to forecast it.” Sanchez said the company needs to sell between 15,000 and 20,000 trucks annually.

Later in the presentation, Sanchez expressed some confidence that the cycle on used truck sales would turn. “If it follows a normal used truck cycle, it would tell you that what you have is upside,” Sanchez said. “It came down for 2 ½ years, it’s now flattened out and it should go back up, if that’s the history.”

But as Sanchez noted, that’s not in Ryder’s forecast. In its projections for 2018, Ryder, after talking about positive growth projections, states: “These benefits are expected to be partially offset by impacts from the extended downturn in the used vehicle market.”

The Stifel report showed an aerial shot of a lot of used trucks in Iowa. The smallest quantity of vehicles could be seen in 2014, a significantly larger number of trucks in 2016, and a smaller number in 2017 though clearly more than the ’14 vehicle count. The report cited the ELD mandate as a reason why reversing the market may be difficult. The mandate “disproportionately (is) pressuring small fleet operators (the main buyer for used tractors). It is unlikely the used market will get significantly better soon.”

Independent research analyst CFRA said recently of the used truck market, “Although Ryder saw strong operating revenues amid good demand, continued weakness in used vehicle values hurt results somewhat.”

Will ELD enforcement weaken the market further?

Sanchez did not address the Stifel report specifically, but said in his remarks that he believes the ELD mandate is already “baked in” to the used truck market. If the ELD mandate was going to push an owner/operator out of the trucking market, it would have occurred already, and “I don’t see them coming in in April and getting out,” a reference to when the ELD mandate is to be more stringently enforced.

On a separate issue, Sanchez said his estimate is that driver wages are up 3-4% in the last year, a number that drew some skepticism from his questioner, who asked Sanchez whether such a number, seen as less than what other companies are reporting, could be a result of the fact that Ryder drivers are home most evenings. “That’s the key,” he said. “Our deliveries are typically closed-loop, the drivers come home every night. So the more experienced drivers seek those routes that have them coming back to the same place.”

The driver shortage has helped Ryder’s Dedicated Transportation Solutions division, Sanchez said, discussing Ryder’s sector that essentially takes over a client’s transportation requirements. Two to three years ago, that division had an 8-9 percent growth rate, with Sanchez attributing it to a serious driver shortage. In late 2016-2017, Sanchez said the driver shortage subsided, “and growth dropped a bit.” But the pipeline of new activity into 2018 is strong enough in that division, spurred by renewed driver tightness, to have Ryder project a growth rate in fleet size of 9% for the year, with 6 percentage points coming from its rental sector.

Stifel asks: where have the margins gone?

Beyond the discussion of used truck sales, the Stifel report was critical of Ryder’s margins in its Fleet Managements Solution division, which includes the vehicle rental and leasing activities. In a chart showing the margins of the FMS group, Stifel asked: “Where have FMS margins gone? Assuming 2014-2015 was boosted by strong used truck pricing, normal EBT margins have not approached 2004-2008 since. Is it the lower-return world leading to lower required returns, or is something else wrong?” Elsewhere, Stifel noted, “the company is indicating that we’ll see single-digit margins for the third straight year (disappointing).”

Still, although Stifel lowered its EPS estimate on Ryder for 2018 to $5.52 from $6.32 (with a minor 1-cent decline in its 2019 estimate to $6.57), it kept a Hold rating on Ryder’s stock.

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