Ryder System, which has been on a string of strong earnings for the last two years even as it has forecast lower profitability in 2023, has had its debt rating upgraded by S&P Global Ratings to BBB+.
The company already had an investment-grade credit at BBB. The lowest investment-grade level is BBB-. BBB+ is two steps above that.
The Moody’s (NYSE: MCO) ratings agency holds a rating of Baa2 on Ryder, which is considered on par with BBB.
The BBB+ rating marks a return to that level for Ryder (NYSE: R) after more than three years at BBB.
Ryder, which is about 50% a vehicle leasing operation and the remainder its Dedicated Services division and Supply Chain Solutions segment, saw its earnings per share on a GAAP basis rise from 48 cents per share in pandemic-struck 2020 to $9.70 in 2021 and just under $17 last year. But given that its performance has been driven to a significant degree by strong prices in used truck markets that are now retreating, Ryder’s forecast for 2023 is earnings of $11.05 to $12.05 per share.
But S&P Ratings (NYSE: SPGI) still sees a company that is doing well enough to merit an increase in its debt rating. “We expect Ryder’s operating performance through 2024 to normalize somewhat from peak levels in 2022 but remain very strong,” S&P said in its report, released Monday.
Although Ryder management has noted the high level of used truck prices as a reason for its recent elevated profits, S&P cited other market conditions that helped contribute to a strong 2021 and 2022, mentioning “strong demand for truck transportation and generally favorable macroeconomic conditions.”
“Production problems related to supply chain disruptions also contributed to limited availability of new vehicles for truck operators,” S&P said. “These factors supported strong performance across Ryder’s business lines (beginning 2021).”
And while an ability to acquire new vehicles has been cited by numerous companies in discussing headwinds they faced the last two years, S&P said Ryder has an “ability to source vehicles more easily than smaller market participants.” That has enabled it to more easily bring in new customers, the ratings agency said.
“Its commercial rental business also benefited from elevated demand and from customers turning to short-term rentals while waiting to take delivery of new vehicles,” S&P said. And the dedicated transportation segment at Ryder, where the company provides both driver and equipment for its customers, “also experienced higher demand due to the tight labor market.”
The higher rating is coming even as S&P said it expects the U.S. economy to grow slowly in the next two years. S&P sees real GDP growth of 0.7% in 2023 and 1.2% in 2024, compared to 2.1% in 2022 and 6% in 2021. It puts the chances of a recession in the next 12 months at 63%.
Given that, demand for rentals is expected to be softer, according to S&P. It also cited the probability of lower used vehicle prices as a challenge facing Ryder. But S&P also believes restrained vehicle deliveries are likely to continue, “which should support a relatively strong demand environment, particularly in the leasing segment.”
S&P said companies like Ryder see their free cash flow generation rise during periods of low capex budgets and fall when the capex spending expands. Given the delays at OEMs and their impact on slowing deliveries of vehicles, that pushed some spending planned for 2022 into 2023, with the expectation of capex spending this year rising to $3 billion from $2.6 billion.
But despite those negative trends — lower profitability and higher capex — conditions at Ryder still merit a debt rating increase, S&P said.
The decline in credit metrics at Ryder through 2024 are coming from a strong level in 2022. But the new metrics are “representative of more normalized levels and supportive of current ratings,” S&P said.
Among the credit metrics cited by S&P are that the ratings agency expects EBIT coverage to be in the 3x to 3.5x range through 2024, down from 5.8x in 2022. The ratio of funds from operations to debt will be in the 30% to 35% range through 2024, compared to 36.8% in 2022. Debt to capital will be in the low 70% range through 2024, in line with a rate of 71.8% in 2022.
Given that the primary concern of S&P and other ratings agencies is not bottom line profitability but generation of adequate profits to service debt obligations, its benchmarks can be different than what a sell-side analyst would look at.
That sort of perspective is why S&P would cite as a positive the fact that many Ryder leases are medium term, defined as four to six years in length, “which provides visibility into the company’s cash flows and minimizes the number of leases coming due in a given year.”
S&P also said it expects Ryder to reprice contracts in its dedicated division and its supply chain solutions segment, which offers warehousing and final-mile services. It has been the SCS group at Ryder that has been the destination for most of Ryder’s recent acquisitions, such as Baton and Dotcom Distribution.
S&P did make a reference to Ryder’s quick period as a takeover target last year, when the investment firm of HG Vora made an offer of $86 per share, which Ryder rejected. HG Vora did not take any further action.
Ryder stock at about 12:15 p.m. Thursday was $84.54, less than the HG Vora offer. Its 52-week high was $102.36 on Feb. 15.
“We believe the uncertainties surrounding financial policy in the context of heightened investor activism in 2022 have now diminished,” S&P wrote.
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