Ryder’s Weak Cash Profile And Consistent Debt Makes For One Highly Speculative Credit Risk Candidate, While Equity Appears Overvalued
Moody’s is materially understating the credit risk of Ryder System, Inc. (NYSE:R) with its Baa1 rating. Our fundamental analysis highlights a much riskier credit profile for R. While their cash flows would cover all obligations going forward, the combination of their cash flows and cash on hand would fall short of all obligations beginning in 2017 as debt maturities would exhaust their remaining cash reserves. We therefore rate R six notches lower at an HY2+ credit rating, or a B1 equivalent using Moody’s ratings scale.
Moreover, CDS markets are materially understating R’s credit risk with a CDS of 76bps relative to an intrinsic CDS of 231bps, while cash bond markets are understating credit risk with a cash bond YTW of 2.686% relative to an intrinsic YTW of 3.506%.
R is trading at the high end of historical valuations with a V/E’ of 28.6x. The market is expecting modest Asset’ growth of 4% going forward, although with ROA’ improving to 6% cost-of-capital levels. Considering consensus estimates for ROA’ to fade below the cost of capital, market expectations appear too bullish. With valuation levels at the high end of the range already, R appears overvalued to fairly valued at best, only if the firm is able to improve their profitability level to meet market expectations.
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