Custom Truck One Source (CTOS) Q2 2025 Earnings: Operational Efficiency and Strategic Expansion Drive Growth in a Shifting Market

Custom Truck One Source (CTOS) delivered a standout Q2 2025 earnings report, reinforcing its position as a key player in the commercial truck customization sector. The company's 21% year-over-year revenue growth and 17% rise in adjusted EBITDA highlight its ability to capitalize on robust demand in Transmission and Distribution (T&D) markets. However, the true story lies in the interplay of operational efficiency, market positioning, and strategic execution that underpins these numbers—and whether CTOS can sustain its momentum amid evolving challenges.

Operational Efficiency: Leverage Reduction and Fleet Utilization

CTOS's Equipment Rental Solutions (ERS) segment demonstrated impressive operational discipline, with average utilization climbing to 77.6%, a 600-basis-point improvement year-over-year. This metric is critical for a rental-heavy business, as higher utilization directly boosts revenue per asset. The 15.6% year-over-year increase in owned equipment cost (OEC) to $1.207 billion also signals a strategic expansion of the rental fleet, albeit with the trade-off of higher leverage.

The company's net leverage ratio of 4.66x remains elevated, but management's plan to reduce it to under 3x by 2026 is ambitious and achievable. With levered free cash flow guidance of over $50 million and inventory reduction targets, CTOS is prioritizing balance sheet flexibility. This is particularly prudent given the $15 million increase in ABL borrowings to fund capex and working capital needs. Investors should monitor whether the leverage reduction path aligns with maintaining growth investments.

Market Positioning: T&D Tailwinds and Strategic Relationships

CTOS's dominance in T&D markets is a cornerstone of its success. The Truck and Equipment Sales (TES) segment reported $303 million in sales—a 22% year-over-year jump—and its second-highest quarterly performance ever. This growth is driven by surging demand for infrastructure upgrades, including utility grid modernization and data center construction. These secular trends provide a durable tailwind, as governments and private firms accelerate investments to meet decarbonization goals and digital infrastructure needs.

The company's Aftermarket Parts and Services (APS) segment, while modest in revenue growth (2.6% GAAP), saw a 26.6% increase in gross profit, underscoring the value of recurring revenue streams. CTOS's long-tenured customer base and multi-decade supplier relationships further insulate it from short-term volatility, creating a competitive moat in a sector prone to supply chain shocks and regulatory shifts.

Growth Potential: Navigating Risks and Tariff Uncertainty

Despite the strong top-line performance, challenges persist. The TES segment's $85 million backlog reduction, while a sign of strong sales execution, raises questions about near-term revenue visibility. Additionally, gross margin contraction in TES—though slightly improved sequentially—highlights margin pressures from inflationary costs and supply chain bottlenecks. Management's optimism about margin recovery in H2 hinges on continued sales momentum and cost discipline.

Tariff risks and emission standard changes remain on the radar, but CTOS has proactively mitigated exposure by accelerating chassis purchases and optimizing its supplier network. The company's assertion that tariffs will have “minimal” impact this year is reassuring, though investors should watch for potential ripple effects in 2026.

Investment Implications: A Buy for Resilience and Execution

CTOS's Q2 results affirm its ability to navigate a complex macroeconomic environment while scaling its core businesses. The company's strategic focus on fleet utilization, leverage reduction, and T&D growth positions it to outperform peers in a sector where capital discipline and market insight are critical.

For investors, CTOS offers an attractive risk-reward profile. The reaffirmed 2025 guidance—$1.97–$2.06 billion in revenue and $370–$390 million in adjusted EBITDA—provides a clear roadmap, while the $50 million+ levered free cash flow target signals improving liquidity. However, the GAAP net loss of $28.4 million (wider than Q2 2024) and $0.13 loss per share underscore the need for continued margin improvement and tax cost management.

Historical data on CTOS's earnings release performance from 2022 to the present reveals a mixed but generally positive pattern. A 50% win rate over 3 days and 60% over 10 days suggests that while short-term volatility is common, the stock has shown a tendency to trend upward in the weeks following earnings reports. The 2.26% maximum return observed on day 30 underscores the importance of patience for investors seeking to capitalize on CTOS's strategic execution and operational momentum.

Final Verdict: Custom Truck One Source's operational efficiency, strategic alignment with infrastructure tailwinds, and proactive risk management make it a compelling long-term investment. While near-term margin pressures and leverage remain concerns, the company's execution track record and capital allocation discipline justify a bullish stance. Investors seeking exposure to the commercial truck customization sector should consider CTOS a core holding, particularly as it balances growth with financial prudence in a rapidly evolving landscape.