Ryder System (R): Q1 Results Impress, Headwinds Remain

On May 19, we issued an updated research report on the Miami, Florida-based Ryder System (NYSE:R) . The transportation company performed impressively in the first quarter of 2016 surpassing expectations on both the fronts.

Earnings improved 4% from the year-ago figure while revenues expanded 4%. All the segments registered growth in the first quarter. The Supply Chain business of the company, which expanded 5% in the first quarter of 2016, is expected to grow further on the back of strong new sales and rise in customer volumes. The company maintains 2016 adjusted earnings projection in the band of $6.10 to $6.30 per share. We expect the company to achieve the guidance driven by its strong product portfolio. The Zacks Consensus Estimate currently stands at $6.14 per share, within the guided range.

We are encouraged by the company's efforts to reward its shareholders through dividend payments. In Jul 2015, Ryder System hiked its quarterly cash dividend by 10.8% to $0.41 per share. This marked the eleventh hike by the company since 2005. The company continues to boost shareholders wealth by paying uninterrupted dividends for more than 39 years. We are also impressed by the board's decision to approve a new anti-dilutive program to buy back up to 2 million shares. The company intends to start buying shares under the program from the second quarter of 2016.

Despite the positives, this Zacks Rank# 3 (Hold) company is faced with a number of headwinds. During the first-quarter conference call, Ryder System issued a disappointing guidance for the second quarter wherein adjusted earnings per share are projected in the band of $1.50 to $1.55, below $1.65 per share recorded in the second quarter of 2015. Below par sales of rental and used vehicles led to the dull forecast. The guidance was reaffirmed at the recently held investor day of the company.

We are concerned about the weak balance sheet of the company. Ryder System exited the first quarter of 2016 with over $5.6 billion of debt as against $5.5 billion at the end of 2015. Cash and cash equivalents were only $56.8 million at the end of the first quarter which also raises concern.

Stocks to Consider

Better-ranked stocks in the transportation sector include FedEx Corporation (NYSE:FDX) , Canadian Pacific Railway Ltd. (NYSE:CP) and GOL Linhas (NYSE:GOL) . All the three stocks carry a Zacks Rank #2 (Buy).