Equipment Rental And Leasing Becomes The Preferred Method For Business Owners Due To Increasing Costs For New Equipment And Maintenance And Tighter Credit; This Exclusive Interview Reveals The Top Beneficiaries Of This Trend
January 23, 2012 - The Wall Street Transcript has just published Equipment Rental & Leasing Services Report offering a timely review of the Business Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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David G. Ross, CFA, Director and Transportation Analyst, joined the Stifel, Nicolaus & Co., Inc., research team in connection with Stifel's acquisition of Legg Mason's Capital Markets Group in December 2005. He covers the freight transportation industry with a concentration in the logistics, LTL and parcel sectors. Mr. Ross joined Legg Mason in 2001. Before that, he worked as a Financial Analyst for RailWorks Corporation, and before that, as an Investment Banking Analyst for Deutsche Bank Alex. Brown in its global transportation and logistics group. Mr. Ross was ranked number one for stockpicking by the Financial Times/StarMine in the road and rail industry in 2009 and 2011, and number two in 2010, and ranked number one by The Wall Street Journal's Best on the Street Analysts Survey in the industrial transportation industry in 2009 and 2010. Mr. Ross earned his B.S./B.A. from Georgetown University with concentrations in finance and international business. He is a Member of the Baltimore CFA Society.
TWST: You mentioned the new engines regulations. When does that come into effect, and what does it mean for the space?
Mr. Ross: A lot of those issues have already come into effect. We had engine-emission standard tightenings back in 2002, 2007 and 2010. Most of the fleets out there in the U.S. are probably still using pre-2007 engines, so 2007 engines are now working their way through; 2010 engines have not yet been purchased by most fleets. Those 2010 engines are where you see the significant bump-up in expense. Trucks are costing closer to $110,000 and $120,000 rather than $60,000, $70,000, $80,000 people might have been used to paying 10 years ago.
TWST: Is that largely reflective of the new standards?
Mr. Ross: Correct. Every time the EPA wants lower emissions, the manufacturers have to allocate greater investment and greater use of technology in order to develop these more advanced engines. In addition, the components, parts and materials are themselves becoming more expensive with commodity prices having risen in the last several years. So there are several factors contributing to the overall higher price of trucks.
TWST: Has demand for leased trucks slowed down as the economy has?
Mr. Ross: I think the answer depends on the particular trucking segment that you're discussing. We focus mainly on the Class A segment, so I could comment on that. Ryder (R) is a company in our coverage that provides those leases - full-service leases, not just finance leases. Those full-service leases include maintenance, as well as some other items, like fuel-tax reporting and insurance. Fuel costs could be included as well. The full-service lease market bottomed earlier this year and is starting to tick back up slightly. But for a while through the downturn, people just weren't renewing their leases when they were coming up. One of the main reasons was that many had private fleets that were too large. Fleets needed rightsizing and the demand for additional vehicles was limited. However, we think that we are at an inflection point here, and that the full-service market should begin to improve.
TWST: What kind of signs are you watching to see whether that's taking place?
Mr. Ross: Ryder is currently the only public company in the truck rental and leasing space, so that's where we look. When their quarterly reports come out, we follow those closely to try to see what's occurring in their rental unit, which tends to be a leading indicator of leases. Miles driven per leased vehicle in their fleets also gives us sense for when the lease fleet is being fully utilized and whether companies need to sign up for more truck leases when they have exhausted the utility of their existing fleets.
TWST: You think that's beginning to happen?
Mr. Ross: Yes, but it's a very slow process. Really, with the economy being as choppy and volatile as it is, we believe companies are going to be somewhat hesitant to sign up for long-term lease contracts without more stability.
TWST: And greater visibility as well?
Mr. Ross: Yes.
TWST: As we look out, what's going on in the truck market itself that's going to affect the space? Are there any further regulations coming along that are going to drive the business or is it only the economy that's going to make a difference here?
Mr. Ross: It's both the economy and the regulatory uncertainty. Pending changes to hours-of-service rules, pending electronic on-board recorder mandates, changes to driver health standards and various other issues with just truck regulations are making it harder to be a truck driver and are limiting utilization of the existing fleet. Anything from a regulatory standpoint that's going to reduce capacity in the trucking segment would be a net positive for the leasing and rental markets, because it's going to require more trucks to do the same job. Given the regulatory environment, we don't see anything on the horizon that's going to increase utilization of the existing fleet, but we see a lot of things that could potentially decrease utilization of the existing fleet and diminish capacity. So overall, we think there is a lot more upside than downside for the leasing and rental market.
TWST: What could reduce utilization?
Mr. Ross: Hours of service is an example. If the new rules proceed as issued, limits on the 34-hour restart rule that extend the rest period needed for drivers are just an example of the critical issues that will likely necessitate more drivers and more trucks in order to drive the same number of miles and same number of hours as today.
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