Raymond James Upgrades Ryder System To Strong Buy: What It Means

• Ryder System, Inc. R has seen an almost 8 percent decline in its share price over the past month.
• Raymond James’ Arthur W. Hatfield has upgraded the rating on Ryder Systems from Outperform to Strong Buy, while maintaining the price target at $105.
• Following the recent pullback, on concerns related to the weakness in Asia, Hatfield believes that the stock now offers a more compelling entry point.

Given that the weakness in Asia is unlikely to materially impact US consumers and that Ryder Systems’ fundamentals have not changed meaningfully, Hatfield believes that the sell-off in the stock was overdone and that the cheaper valuation offers an attractive investment opportunity.

“Underlying fundamentals point toward a healthy truck environment, and fleet conversion and on-demand maintenance opportunities point to higher margin and spread potential,” Hatfield elaborated.

In addition, the company has been delivering material earnings growth in recent years, driven by organic momentum, since acquisition have been rare. Going forward, Ryder Systems could witness high single digit growth across all three of its businesses, with double digit growth in the Dedicated Transportation Solutions business.

According to the Raymond James report, “Ryder’s commercial rental business, notably its fleet growth, was a point of concern for a lot of investors in 2Q as the economic backdrop did not appear to support 7.4 percent year on year growth in the fleet through 2Q15.”

However, the management noted that no major changes have taken place in the commercial rental business. Hatfield believes that the disconnect between the economic fundamentals and growth in this business comes from a belief that commercial rental acts as a lagging indicator of the underlying fundamentals.

“If trucking capacity does tighten in 2H15, it would certainly help utilization, and earnings, of the commercial rental business but recent fleet growth does not appear to be overly dependent on capacity tightening in order to work out well for Ryder,” Hatfield added.