INITIATING COVERAGE REPORT

Trucking and Commerical Transportation

William C. Dunkelberg Owl Fund 18 September 2013

Ryder System, Inc.

Exchange: NYSE Ticker: R Target Price: $72.60
Michael Lam Lead Analyst mlam@theowlfund.com Gabriel Tursi Associate Analyst gtursi@theowlfund.com Jesse Barone Associate Analyst jbarone@theowlfund.com

RECOMMENDATION
Ryder Dividend Yield Projected Return

BUY
$ 62.04 2.27% 19.31%

Market Data
52 week trading range Shares Outstanding ($mm) Market Capitalization ($mm) Enterprise Value ($mm) $42.78-$64.99 52.3 $3,176.8 $7,017.73 $73.4 $3,914.41

Financial Data ($mm)

COMPANY OVERVIEW Ryder is a leader in transportation and supply chain management solutions with a fleet of over 170,000 vehicles. They operate in two business segments: Fleet Management Solutions (65.89% of revenue, 72.75% of profit), which provides full service leasing, contract maintenance, contract-related maintenance, and commercial rental of trucks, tractors, and trailers to customers principally in North America with some presence in the U.K; Supply Chain Solutions (34.11% of revenue, 27.25% of profit), which provides comprehensive supply chain consulting including distribution and transportation services in North America and Asia. Ryder operates primarily in the US (83.6% of revenue) with operations in Canada (7.63% of revenue), Mexico (2.29% of revenue), Europe (6.14% of revenue), and Asia (.32% of revenue).

Cash & Equivalents Debt

Industrials Sector

Earnings History
Earnings Date FY12 Q3 FY12 Q4 FY13 Q1 FY13 Q2 EPS
$1.25

Revenue
$1,573.3

Price
5.50%

$1.17 $ .81 $1.25

$1,583.5 $1,563 $1,604

4.64% -6.91% -.65%

INVESTMENT THESIS The trucking industry is highly responsive to economic conditions and relevant events. Ryder is especially reactive because it is a highly levered company. In the past 6 months the US economy has experienced tapering scares from the Federal Reserve, oil price fluctuation due to events with Syria, and a government shutdown. These events have stagnated the overall industry, specifically Ryder, which now trades at a discount versus its peer group and the S&P 400 Trucking Index based on 3 year implied EV/EBITDA and P/E multiples. However, Ryder is still one of the leading providers of transportation and logistics services, and continues to benefit from a stable economic moat that is developed from the capital intensive nature of its industry, its fleet size and facility locations, and its one-stop differentiation strategy. Ryders continuing expansion of its natural gas vehicle count, the declining age of its overall fleet, and the stable growth of its leasing volume has positioned the company to benefit from the growing industry and the recovery of the US economy.

Analyst Consensus Estimates

Earnings Date FY13 Q3 FY13 Q4 FY14 Q1 FY14 Q2 EPS $1.44 $1.33 $.93 $1.38 Revenue $1,630.01 $1,639.74 $1,618.84 $1,668.65

All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with companies covered in its research reports. Thus, investors should be aware of possible conflicts of interest that could affect the objectivity of this report.

Fall 2013

Catalysts
Ryder has expended its natural gas fleet size to over 300 vehicles and is continuing to grow its number of natural gas maintenance facilities. This gives the company a first movers advantage as vehicles that run on alternative fuel begin to grow more popular and become more accessible in the industry. Ryder continues to replace part of their fleet with new vehicles in order to decrease the average age of the overall fleet. The younger fleet requires less maintenance and is more efficient which in turn lowers costs and boosts margins. Earning leasing contracts with large services company (Mama Bosso, ARR Craib Transport, and Food Authority) along with the continuing recovery of the US economy will increase the long term growth of Ryders full service leases. The North American freight sector and transportation services sector is forecasted to grow sales by a CAGR of 3.3% and 3.4% for the next five years as the economy continues to recover. Ryders underfunded pension funds accumulated a net pension equity charge of $645 million and $595 million at the end of 2012 and 2011. These are one time charges in 2013, which frees up cash flow in 2014 for future capital expenditures or shareholder returns.

Drag Factors
About 83.6% of total revenue is from the US market. This makes Ryder highly correlated with the macroeconomic conditions of the US market. Therefore, any disruptions in the recovery of the American economy would cut down revenue growth. Ryders costs fluctuate along with fuel prices. Any shortage in supply or increases in price would compress the companys margins and earnings. Each business segment is subject to compliance of government regulations on safety, air emissions, and drivers service hours. Any infraction of these regulations hurts public image and yields hefty fines; therefore adding more costs to the company. Ryder not only faces competition from its trucking peers, but from financial lessor and other transportation/logistic sectors. Any shifts in pricing power could inhibit Ryders ability to increase leasing rates and compress margins.

ECONOMIC MOAT
DESCRIPTION: NARROW and STABLE Barriers to Entry: Ryder operates in a capital intensive industry where high barriers of entry are created from the large capital and time investment required to start in the industry. Differentiation: The FMS segments customized approach to leasing and the SCS segment supply chain add-on services creates synergies to make Ryder a one-stop shop. Vehicle Count: With a fleet size of over 170,000 vehicles, Ryder has become a world leader in the trucking industry. Location: Ryders high capital expenditure has increased the total number of facilities within the US to 537. These locations have increased the overall convenience and accessibility for current and potential customers.

Geographic Segments
2% 0% 6% 8% US Canada

Europe
84% Mexico Asia

The William C. Dunkelberg Owl Fund

Page 2

Fall 2013 Peer Group Identification

Knight Transportation (KNX) Provides asset-based dry van truckload, temperature-controlled truckload, and dedicated truckload services Old Dominion Freight (ODFL) Provides logistics services, including ground and air expedited transportation, supply chain consulting, transportation management, truckload brokerage, container delivery, and warehousing services Werner Enterprises (WERN) Engages primarily in hauling truckload shipments of general commodities in both interstate and intrastate commerce in the United States and internationally

Target Price
Peer Group Valuation: Using Consensus NTM EBITDA is equal to $ 1510.95mm. The peer group valuation indicates an implied EV/EBITDA of 5.03x. These values yield an enterprise value of $7,605.13mm Discounted Cash Flow: The WACC used is 7.02%. The industry analysis indicates an implied EV/EBITDA of 5.03x and a perpetuity growth rate of 2.0%. These values yield an EV of $6,965.4mm and $7,387.9mm Cash ($73.4mm) is added and total debt ($3,914.4mm) is subtracted to obtain the equity value. The equity value is divided by the shares outstanding (52.3mm) to arrive at a target price. The price of the two valuation approaches are averaged together to yield the price target

Target Price: $72.60 Peer Analysis: Target Price = $71.97 Discounted Cash Flow Analysis: Target Price = $73.26

INDUSTRY REPORT
Trucking The U.S. fleet market is estimated to include about 7.2 million vehicles, populated primarily by privately-owned companies with their own fleet services. In recent years, these companies have been outsourcing their trucking processes in order to achieve higher efficiency, to avoid fluctuation in fuel prices, and to put a stronger emphasis on the quality of maintenance and safety programs. The revenues for the sector are forecasted to accelerate at a CAGR of 3.3% for the next five years from 2012-2017, which equates to a value of $1,078.5 billion by the end of 2017. However, large carriers have begun to focus more on asset optimization and client profitability due to the YOY decrease in volumes caused by the clients tighter control over inventories. The industry is now undergoing an increase in core pricing with an expected average increase of 1%-2% for most truckload carriers in 2013, following an increase of 3%4% in 2012. EBITDA in 2Q 2013 for the group showed a 1.2% increase YOY. Logistics spending in Ryders target markets is estimated to be over $3 trillion, where $250 billion is outsourced. The industry is forecast to accelerate at a CAGR of 3.4% for the next five-years from 2012 - 2017, which will drive the industry to a value of $1,313.2 billion by the end of 2017. Disruptions such as Hurricane Sandy, have caused companies to put a greater focus on risk management of their supply chains. As supply chains continue to become more complicated, the demand for expert supply chain providers will grow. Diesel Fuel vs. Natural Gas Diesel fuel is the second largest cost for carriers, and with the increasing spread between diesel fuel and natural gas prices; fleet owners are starting to consider converting to natural gas vehicles. According to the Department of Energy, the average price for diesel fuel YTD is about $3.91 per gallon versus natural gass $2.14 per gallon, or an equivalent $2.39 per gallon since natural gas is less efficient than diesel. Diesel fuel prices increased over the first 11 weeks of 2013, but began trending lower. Ryder System Inc. is participating in a $38.7 billion public-private partnership with San Bernardino Associated Governments (SANBAG) to launch a heavy-duty natural gas truck rental and leasing operation in Southern California. It is also overhauling three maintenance facilities in the area to support the natural gas initiative. The program will replace 1.5 million gallons of diesel fuel annually with natural gas. As of mid-July 2013, the company had over 300 natural gas vehicles in service.

The William C. Dunkelberg Owl Fund

Page 3

Fall 2013 FINANCIAL ANALYSIS

Sales: Sales have been growing at a CAGR of 5.92% from $4.89 billion in 2009 to $6.25 billion in 2012. The consensus estimate is for Ryder to grow sales at a 3.49% CAGR in the next 3 years ($6.44 billion for 2013, $6.73 billion in 2014, and $7.16 billion in 2015). In Q2 FY 2013, Ryder reported sales of $1.6 billion, a YOY gain of 3%. Ryders sales have been driven by organic growth in the SCS business, increases in full services leasing, and increases to the core rates.

Segment Sales
5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2009 2010 2011 2012

The SCS segment has grown at an 18% CAGR since 2009, and is expected to continue growing at 5%-6% per year. In Q2 FY 2013, the SCS segment reported a sales increase of 4.7% YOY, driven by strong dedicated demand in each sub segment. The industrials (22% growth YOY) and CPG Logistics (5% growth YOY) were the main drivers that contributed to top line growth. Sales growth in this segment will continue to benefit from new outsourcing opportunities, and trucking regulations. The FMS segment has grown at a 5.4% CAGR since 2009, and is expected to continue growing at a 3%-4% growth rate per year. In Q2 FY 2013, the FMS segment reported a sales increase of 2% YOY, driven by a 3.6% increase in Full Service Lease revenues. Sales in the FMS will continue to benefit from rising core rates, increasing popularity of natural gas vehicles, and capitalization on old and new contracts. Margins Analysis: Ryders margins have remained relatively consistent over the past 4 years after decreasing significantly during the financial crisis. Gross margin has remained within 1%-2% of 20% over that time period. EBITDA margins have fluctuated between 22%-24% over the same time period. Net income margin has almost tripled since 2009, expanding from 1.3% to 3.7%.
Margins Analysis

Management expects the FY 2013 margin to expand toward pre-recession levels in both segments. The FMS segment is expected to post full-year, double-digit margins for the first 2009 2010 2011 2012 LTM NI EBITDA COGS time since 2008. The SCS segment is expected expand margins through top line growth driven by new services specifically within its industrials and CPG logistics sub-segments. Ryders consistent margins are attributed to the companys commitment to ongoing maintenance initiatives and to managements strong control on the companys cost structure. The net income margin has especially benefited from these initiatives as well as from decreased benefits spending, and lower fuel cost. Ryders overall margins are expected expand towards pre-recession levels due to the by growth in its leasing environment, benefits from fleet replacements, improving residual values, new products and services, and cost management.

The William C. Dunkelberg Owl Fund

Page 4

Fall 2013
Earnings: Ryder has beaten quarterly earnings estimates for the last 14 quarters by an average of 9.12%. From 2009 to 2012, EPS has grown at a 16.49% CAGR from $1.51 per share to $2.78 per share. Consensus estimates that Ryders EPS will grow at a 22.59% CAGR: $4.84 for 2013, $5.497 in 2014, and $6.287 in 2015. EPS has been able to outpace the companys sales growth because of cost saving initiatives and stronger leasing outlook. In the Q2 FY 2013, Ryder reported an EPS of $1.25, up 15% YOY driven by the improved performance of both segments. FMS earnings were up 16% YOY due to higher utilization and increased pricing, and SCS earnings increased 8% YOY due to lower benefits costs and increases in new business. Ratio/ Profitability Analysis: Profitability Ratio
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

ROA ROC ROE

2009

2010

2011

2012

LTM

Historically Ryders profitability ratios have remained steady since the financial crisis. Return on Assets has grown from 3.4% in 2009 to 3.7% in 2012. Return on Invested Capital has increased from 5.4% in 2009 to 5.8% in 2012. The most significant change is in Return on Equity, where Ryder has increased its ROE from 6.5% in 2009 to 15.2% in 2012. Currently Ryder has a lower ROA (8.8%) and ROIC (12.1%) versus its peer groups median. However, Ryders ROE is much higher than its comps who had an ROE of 13.5% compared to the 15.2% of Ryder.

Dividend The current dividend yield is 2.2% and the payment has increased in 9 quarterly payments of $.02 to $.03 since 2005. In the past year, the yield has decreased from 2.8% to 2.2% because Ryders price has appreciated at a higher rate than the incremental increases of dividend payment. The current dividend payout ratio is 27.6%, a YOY decrease of 1.6%, due to higher level of capital expenditure. However, management is still committed to increasing its dividend by 8%-10% each year. Balance Sheet Liquidity Since 2009, Ryders current ratio has remained steady around 1.0x, and net working capital is currently at $-134.3 million. Ryders liquidity ratios are in line with the rest of the industry and to its pre -recession history. Ryder compensates for these low liquidity levels through a trades receivable purchase and sales program where the proceeds are limited to $175 million. The company also has a $900 million global revolving credit facility to finance the networking capital. Debt: **For maturity schedule, please check attachments** Ryder maintains high leverage ratios in order to acquire and service its large fleet. The company has maintained a stable credit rating of BBB from Standard and Poors. Currently Ryder has $3,914.41 million in total debt outstanding, of which 73.7% is on a fixed rate and 26.3% is on a floating rate. Ryder also has a maturity wall in 2016, when about $1,796 million is due. Of the amount due in 2016, about $900 million is part of a global revolving credit. The company must maintain a ratio of debt to consolidated network of 300% or less in order to maintain this funding; as of the end of 2012 that ratio was listed at 180% with $483 million still available. Ryders debt to

The William C. Dunkelberg Owl Fund

Page 5

Fall 2013
$600.00 $500.00 $400.00 $300.00 $200.00 $100.00 $-

Interest Coverage

4 3.5 3 2.5 2 1.5

equity has is substantially higher than its peers at 2.50x, which is a substantial increase from the 2009s 1.92x. However, Ryders interest coverage ratio in the same time period has grown from 2.4x to 3.6x. As a highly leverage company, it is important that Ryder can generate enough operating income to cover its interest expense. Management also expects to lower the companys total debt, as interest rates begin to increase.

2009

2010
EBIT

2011
INT EXP

2012

LTM
TIE

Inventory/Fleet size: Ryders fleet can be separated into two FMSs sub-segments, full service leasing and commercial leasing. Currently the fleet count for full service lease vehicles is at 120,300, a 1.7% decrease from the 2012 count of 121,600 vehicles. In the commercial rental segment, the 2013 count is 38,000 vehicles, a 7.54% decrease from 2012s 41,100 count. Ryder has about 9,600 vehicles available for sale and has already sold 6,000 units YTD; this represents Ryders commitment to the replacement of older units to decrease average age and maintenance costs. Ryder has utilized the lower interest rate environment to acquire a younger fleet. The average age of the fleet has decreased from 56 month in 2011 to 47 months in 2013, and is expected to decrease to 40-42 months in 2014. Capital Expenditure: Ryder has utilized the low interest environment to expand its capital expenditures on new vehicles and capacity expansion, specifically the full service lease and commercial rental sub-segments. Ryder aggressively increased capital expenditure from $651.95 million in 2009 to a historical high of $2.133 billion in 2012. Capital expenditures are expected to reach $1.8065 billion by FY 2013 year end. This estimate is a 15.3% decrease from the 2012 historical high and is in line with managements expectation to decrease capital expenditure to $1.6 -1.75 billion in 2014 Pension Liabilities: In 2012 and 2011, Ryder accumulated pension equity charges of $645 million and $595 million, respectively, due to the impact of a lower discount rate that underfunded the defined benefit plans. These costs have been a drag factor for the operations of FY2013, since Ryder has to pay out the difference of the underperforming funds. Ryder has frozen and restructured most of these funds, so the charges will not be recurring. The completion of these payments will free up cash in 2014 allowing for possible shareholder returns or capital expenditure. Cash Flow: Ryder cash flow from operation (CFFO) has been increasing at CAGR of 4% since FY2009 where CFFO FY 2012 was $1,152.28 million and $2,007.83 million LTM. However, Ryder has generated increasingly negative free cash flow (FCF); where in FY2012 FCF was $-980.95 million and in the LTM, $-1,564.36 million. CCFO/Capex has decreased from 1.51x in 2009 to .54x 2012 and CFFO/ Total Liabilities has decreased from 20.38x to 16.82x in the same period. These ratios show that FCF has been trending downward due to increasing capital expenditures and total debt. Managements commitment to decreasing both capital expenditure and total debt will help FCF trend upward. Capex

2009

2010

2011

2012

2013E

2014E

The William C. Dunkelberg Owl Fund

Page 6

Fall 2013 VALUATION

Undervaluation The growth of the trucking industry has historically grown at the same rate GDP growth, and therefore is highly reactive to macroeconomic trends and events. Ryder is more sensitive to these events due to its status as a highly levered and capital intensive company. In the past six months recent events such as the Syrian Crisis, the government shutdown, and fears of tapering have led to higher levels of economic uncertainty. This uncertainty has increased the risk of Ryders operations and resulted in compression of Ryders stock price and trading multiples. Over the past six months the stock price has fluctuated as much as 16% based on news releases, when measured against these events. Based on a 3-year trend, Ryder consistently trades at a 47.64% discount to the S & P Trucking Index based on EV/EBITDA and 37.74% discount based on P/E versus the index. Currently, Ryder is trading at a 49.57% discount based on EV/EBITDA and a 46.77% discount based on P/E versus the index. Ryder has consistently traded below its peer group based on the P/E and EV/EBITDA multiples. Ryder on average trades at a 27.61% discount based on the P/E multiple and a 36.82% based on the EV/EBITDA multiple against their peer group. However, the company is currently trading at a 35.38% discount based on P/E and a 38.39% discount based on EV/EBITDA due to the reasons mentioned. When compared to its historical 3-year median, Ryder is currently trading at 8.38% premium on an EV/EBITDA basis and a 2.5% discount based on P/E. Relative Multiple Comparison The companies used in the relative valuation are Knight Transportation (KNX) Old Dominion Freight Lines Inc. (ODFL), and Werner Enterprises Inc. (WERN).The peer group includes companies that operate in the same segments as Ryder (FMS and SMS Supply), similar size/market cap, and similar geographic footprint. Ryder historically trades at a 36.8% discount to the peer group 3 year average on an EV/EBITDA. However, Ryder is currently trading at a 39.5% discount to the peer groups average EV/EBITDA of 7.97x due to reasons stated above. Therefore the implied EV/EBITDA multiple that Ryder should be trading at now is 5.03x. Using the 5.03x implied EV/EBITDA and consensus NTM EBITDA of $1,510.95 million yields an enterprise value of $7,605.13 million. Adding back $73.4 million in cash, subtracting out $3,914 in total debt, and dividing by the 52.3 million shares outstanding yields a price target of $71.97.

The William C. Dunkelberg Owl Fund

Page 7

Fall 2013
Discounted Cash Flow Assumptions The 7 year sales growth at a CAGR of 3.6% is derived from the expected growth of the overall trucking and transportation services industry. Gross margin and EBITDA margin are expected to grow due to the decrease in maintenance cost created from Ryders younger fleet, growing natural gas fleet, and commitment to cost cutting initiative. Depreciation historically have been around 15% of sales, however this ratio will grow as Ryders begins assessing depreciation expenses to its increasingly younger fleet. Assumptions that capital expenditure and long term debt will decreased is based on the expectation that management will decrease capital expenditure in order to meet its target debt to equity and avoid rising interest rates. Management has recently decreased Ryders total debt to equity expects to maintain leverage ratio between 2.25x and 2.75x for the next few years. Weighted Average Cost of Capital The WACC is calculated to be 7.02% using the 6 year average weights of 46% for Equity and 54% for Debt. Cost of capital of 12.69% is calculated using CAPM, with a risk free rate of 2.58 %, a market risk premium is 9.93%, and using a beta of 1.457. The cost of debt of 2.26% is calculated the using the pre-tax weighted cost of ST debt or .0224%, the pre-tax weighted cost of LT debt of 2.40%, and the effective tax rate of 34.82%. Price Target For the EV/EBITDA method, the implied EV/EBITDA of 5.03x is derived from the relative valuation. This method yields a discounted terminal value of $6,683.1mm, an enterprise value of $6,965.4mm, and a price target of $69.24 per share. For the growing perpetuity method, a 2.0% growing perpetuity is used because the trucking industry in the US has historically has consistently grown at the same rate as US GDP. This method yields a discounted terminal value of $6,105.6mm, an enterprise value of $7,387.9mm, and a price target of $77.31 per share. The average of these two values yields a price target of $73.26.

DCF WACC: 7.5% EM: $69.24 GM: $77.31 Price $ 73.26

EV/EBITDA EV/EBITDA: 5.03x EBITDA: $ 1510.95 mm Price: $71.97

Target Price

$ 72.60

APPENDIX

The William C. Dunkelberg Owl Fund

Page 8

Fall 2013

APPENDIX
R benched marked vs s Peers 3 year EV/EBITDA

0.70x

0.65x

0.60x

0.55x

0.50x

Ryder System, Inc. (NYSE:R)/Index: KNX, WERN, ODFL - TEV/EBITDA

R benched marked vs S&P 400 Trucking 3 year EV/EBITDA

0.62x

0.57x

0.52x

0.47x

0.42x

Ryder System, Inc. (NYSE:R)/S&P 400 Trucking (Sub Ind) Index - TEV/EBITDA Ryder System, Inc. (NYSE:R)/S&P 400 Trucking (Sub Ind) Index - TEV/EBITDA: Median

The William C. Dunkelberg Owl Fund

Page 9

Fall 2013 R 3 year EV/EBITDA

5.50x 5.30x 5.10x 4.90x 4.70x 4.50x 4.30x 4.10x 3.90x 3.70x 3.50x

Ryder System, Inc. (NYSE:R) - TEV/EBITDA

DCF Financial Projection Summary

The William C. Dunkelberg Owl Fund

Page 10

Fall 2013

DCF FCF Projection Summary

DCF Sensitivity Analysis: GM Method

DCF Sensitivity Analysis: EM Method

The William C. Dunkelberg Owl Fund

Page 11

Fall 2013 Fleet Count

Average Fleet Age

The William C. Dunkelberg Owl Fund

Page 12

Fall 2013 Historical D/E

Maturity Schedule

Debt Distribution
$2,000.00 $1,800.00 $1,600.00 $1,400.00 $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00 $2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Interest Revolver Term Bond

The William C. Dunkelberg Owl Fund

Page 13

Fall 2013

DISCLAIMER
This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward looking statements contained within are simply the authors opinions. The writer does not own any of the Ryder Systems, Inc. stock.

TUIA STATEMENT
Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in real-world principles of economics and business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Funds goals are threefold: Provide students with hands-on investment management experience Enable students to work in a team-based setting in consultation with investment professionals. Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.

The William C. Dunkelberg Owl Fund

Page 14