CTOS: A Strategic Entry Point Amid Short-Term Headwinds

The stock market often rewards investors who can distinguish between temporary setbacks and structural trends. Custom Truck OneSource (CTOS) is currently offering precisely this opportunity: a company that delivered a Q1 earnings disappointment but is positioned to capitalize on durable long-term catalysts, creating a compelling entry point for value-oriented investors.

The Q1 Miss: A Snapshot of Temporary Challenges

CTOS reported Q1 2025 revenue of $422 million, missing estimates by $12.29 million (2.8%) and sending shares down 2% to $3.95, near its 52-week low. The miss was driven by three factors:
1. Macro Uncertainty: U.S. tariff policy volatility disrupted inventory planning, while high interest rates dampened capital expenditures from smaller customers.
2. Segment Pressure: The Truck Equipment Sales (TES) segment saw margin compression due to pricing challenges, even as order backlogs surged.
3. Cost Headwinds: Rising material costs and supply chain inefficiencies weighed on margins, particularly in the Accessories & Parts (APS) segment.

Why the Full-Year Outlook Still Shines: Structural Tailwinds Ahead

Despite Q1 turbulence, CTOS reaffirmed its full-year guidance of $1.97–2.06 billion in revenue and $370–390 million in adjusted EBITDA, with management citing five key growth accelerants:

1. Rental Business Dominance

The Equipment Rental & Sales (ERS) segment delivered 13% revenue growth, fueled by record-high fleet utilization (77.8%) and a $1.2 billion average OEC on rent—up 13% year-over-year. With plans to expand the rental fleet by mid-single digits in 2025, this segment is primed to capitalize on secular trends like utility grid modernization and data center infrastructure spending.

2. Expanding TES Backlog

While TES revenue dipped slightly, its order backlog jumped 14% to $420 million, with April sales hitting record levels. This backlog represents 4.8 months of sales—a healthy level that bodes well for H2 execution. The vocational vehicle market, critical to TES, is benefiting from manufacturing onshoring and utility maintenance spending.

3. Strategic Inventory Mitigation

CTOS has pre-purchased chassis and equipment to avoid tariff-driven cost spikes, a move that should stabilize margins as tariffs solidify. With $51 million in sequential backlog growth, the company is well-positioned to convert orders into revenue once supply chain bottlenecks ease.

4. Debt Reduction on Track

Despite a net leverage ratio of 4.8x (down from 5.3x in Q4), CTOS aims to slash leverage to below 3x by 2026 using levered free cash flow of $50–100 million in 2025. This deleveraging will reduce interest expenses and free up capital for growth.

5. Long-Term Market Resilience

The company operates in sectors with $100 billion+ in annual spending on utility infrastructure, rail, and telecom, all of which are undergoing modernization. CEO Ryan McMonigle noted, “Utility customers are spending to keep up with unprecedented electricity demand,” a trend that will sustain rental and equipment sales for years.

Valuation: A Discounted Entry into a Growth Story

CTOS trades at just 4.3x forward EBITDA, a steep discount to its five-year average of 6.5x and well below peers like Roper Technologies (10.2x). The stock’s near-term dip has created a rare opportunity to buy into a company with:
- A $370M+ EBITDA floor supported by recurring rental revenue.
- $1.55 billion in record rental OEC, signaling scale and growth potential.
- A PEG ratio of 0.8 (growth outpacing valuation).

Risks to Consider

• Tariff Volatility: U.S. trade policies could disrupt inventory costs and customer purchasing behavior.
• Debt Levels: While deleveraging is underway, interest costs remain elevated until leverage drops further.
• Competitive Pressures: New entrants in the rental market could cap margin expansion.

The Bottom Line: A High-Conviction Value Play

CTOS’s Q1 miss is a blip in a story of structural growth driven by secular infrastructure spending and a resilient rental business. With shares at 40% below their 2023 highs and valuation multiples at multiyear lows, the risk-reward here is compelling. Investors with a 3–5 year horizon should consider establishing a position here—especially as H2 execution on backlogs and fleet expansion could drive a sharp revaluation.

The market’s knee-jerk reaction to short-term noise has created a rare opening in a company with durable moats and clear pathways to deleverage and grow. This is a buy.