Ryder System’s shares are now trading roughly $5 less than the offer price put forth last week by HG Vora Capital, pushing it even further away from what Wall Street company Baird sees as the potential value of the company.
In a report issued in the wake of the acquisition offer by the private equity company, Baird analyst Garrett A. Holland did not refer to Ryder’s valuation through a “sum of the parts” prism, which was raised in the wake of the HG Vora offer. The idea behind a sum of the parts valuation is that if the value of the three Ryder units — Fleet Management Solutions (FMS, which performs the main leasing activity), Supply Chain Solutions (SCS, a contract logistics company) and Dedicated Transportation Solutions (DTS, which serves the transport needs of a dedicated clientele) — were calculated separately, their total value would be in excess of the $86 per share offer by HG Vora.
Instead, Holland sees a greater value for Ryder (NYSE: R) on the projected performance of the three units. However, he did not change the $85 Baird target price for the company, which already has been reached.
Holland’s note for Baird says the price offered by HG Vora was, at the time it was made, a roughly 25% premium to the 30-day trailing volume weight average price and a 20% premium over the closing price a day before the offer was made. “It represents pricing near levels realized to start the year and again in March, as both the near-term earnings outlook and through-the-cycle return potential has strengthened.”
Holland reviewed Ryder’s recent earnings, noting that the company is likely to be “overearning” now because of strong results in the used equipment market, where Ryder is a key seller. But Ryder management has projected earnings per share of between $13 and $14 for 2022, after earning $9.58 in 2021.
A “take-out” value of $86 is less than 10X normalized earnings, Holland said, which he described as “underwhelming.”
“We think a take-out value would need to approach $115 to $120 to more appropriately credit the company for earnings/growth prospects and a control premium,” Holland wrote.
“We view a near-term sale as unlikely unless take-out value rises meaningfully,” Holland said in the opening sentence of the report.
After surging last Friday, the day of the offer, Ryder stock had held above $86 through Tuesday. But the sharp decline Wednesday brought it down to close that day at $80.75, $5.25 less than HG Vora’s offer.
Ryder has not commented on the offer except to acknowledge its existence. The key date for a response might be June 3; Holland said Ryder is holding an investors day on that date.
The decline in Ryder stock from about $84.30 per share in mid-March to approximately $63 around April 11 was caused primarily by “market concerns about an imminent end to the freight cycle, [which] pressured transportation stocks such as Ryder and contributed to valuation de-rating,” Holland said.
But he’s a supporter of the company’s management, which he said “has made progress executing a strategy to deliver higher/less volatile returns along with steady growth.”
What Holland described as “secular outsourcing tailwinds” will aid the SCS and DTS businesses, which “should help sustain better-relative growth.” There also is a management commitment to “more measured growth” at FMS, which now constitutes 55% of revenues and which Ryder management has said will become smaller as the SCS and DTS arms get stronger.
“Interest in fleet outsourcing and full-service lease options is rising among private fleet operators, given rising equipment costs and increased vehicle complexity following multiple engine emission standard changes,” Holland said, adding that the FMS segment “is attractively positioned to benefit from this secular shift in increased outsourcing of fleet-related services.”
That strength at FMS is a key reason why Holland sees Ryder’s forecast for a return on equity in the high teens “over the cycle,” up from 15% earlier. And in 2022, that figure is expected to be 23% to 25%.
While Holland isn’t changing Baird’s $85 target price, he does say that “a sale of the company and/or divestiture of business units would likely result in a meaningfully higher valuation.”
The reference to the divestiture of a business unit is one scenario that has been discussed for a potential Ryder-HG Vora deal to end the takeover attempt and satisfy HG Vora’s concerns: Ryder sells SCE, DTS or both, leaving behind the core truck leasing operation and yielding more valuation for one or both of those units in a sale than it is getting in the company’s stock price.
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