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Riding Ryder System, Inc. (R) to a Better Economy

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The trucking industry has historically been tied to the underlying economy. Thus, an improving economy should help lift the industry.


So what’s the best way to play the impending trucking growth? Ryder System, Inc. (NYSE:R) could be one of the big benefactors of a rebounding economy. Ryder System, Inc. (NYSE:R) provides truck leasing and rental, logistics and supply chain management solutions, with customers that range from small businesses to large international enterprises.

Economic tailwinds

According to S&P, freight volumes have been improving since mid-2009. Although there is competition afoot in the industry from railroads, the large truckers and transportation companies should still manage to grow nicely alongside the rebounding economy.
Notable market pundit Bill Gross of Pimco doubled his forecast for growth in U.S. GDP to 3% in 2013, up from the firm’s December forecast of about 1.2% to 1.7% in 2013.
Also, both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) predict 2% to 3% GDP growth for 2013.

Ryder’s business lines

Ryder System, Inc. (NYSE:R)‘s key segment is fleet management solutions (FMS), which accounts for more than 70% of revenue. FMS provides full service leasing, contract maintenance and commercial rental of trucks, tractors and trailers to customers.

The company projects contractual revenue in lease-and-contract maintenance to grow 4% in 2013, reflecting organic growth and higher lease rates on new sales.

Its supply chain solutions is its next largest segment (30% of revenue), providing comprehensive supply chain solutions, including distribution and transportation services throughout North America and Asia. The company expects that supply chain operating revenue will grow 6% in 2013.

Based on robust growth in both its key segments, Ryder is targeting operating revenue growth of 4% for 2013, with earnings growth of 8% to 11%.

Why ride Ryder?

Acquisitions are a key role in Ryder’s business model. Ryder System, Inc. (NYSE:R) tapped new business opportunities with the 2011 acquisitions of Carmenita Leasing and Scully Companies, helping expand its fleet and contractual customers. A late-2011 acquisition included Hill Hire (the British company for commercial truck leasing), and in 2012 Ryder bought UK-based Euroway Group, another commercial truck leasing business.

Part of Ryder’s other growth initiatives include its targeting of emerging markets for fuel-efficient vehicles under projects like SANBAG (San Bernardino Associated Governments). Last month, Ryder entered into its first full-service lease agreement for providing 23 compressed natural-gas tractors to Louisiana-based Eagle Distributing of Shreveport, LA.

Ryder has been actively preparing for greater demand. In 2012, the company spent nearly $2.2 million, most of which went to buy new lease vehicles to meet higher customer demand on lease renewals. In 2013, Ryder plans to invest more than $5.6 billion, representing its highest capital investment in the past decade.

At the end of 2012, Ryder had 14 hedge funds long on the stock. Not as robust as some of the more “well-known” stocks, but there are a couple of top-name hedge fund owners, including Cliff Asness’s AQR Capital and billionaire Israel Englander’s Millennium Management.

Competitors

Other notable competitors include J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), Hub Group, and Knight Transportation (NYSE:KNX). J.B. Hunt provides truckload, intermodal, and contract-carriage services to customers across a diverse set of industries. The company has been slowing its investment in intermodal containers, hoping to focus on asset utilization.

Yet its intermodal segment still accounts for over 60% of revenue, where J.B. Hunt partners with various railroads to provide freight solutions. While Ryder is excelling in the fleet-leasing business, J.B. Hunt’s bread and butter is intermodal. J.B. Hunt also has a dedicated contract-services unit, which accounted for 21% of 2012 revenue. The segment provides equipment and drivers for the exclusive use of a single shipper.

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