Custom Truck One Source (CTOS)

Heavy equipment distributor Custom Truck One Source (NYSE:CTOS) missed Wall Street’s revenue expectations in Q1 CY2025 as sales rose 2.7% year on year to $422.2 million. On the other hand, the company’s full-year revenue guidance of $2.02 billion at the midpoint came in 2.1% above analysts’ estimates. Its GAAP loss of $0.08 per share was 36% below analysts’ consensus estimates.

Company Overview

Inspired by a family gas station, Custom Truck One Source (NYSE:CTOS) is a distributor of trucks and heavy equipment.

Historically, specialty equipment distributors have boasted deep selection and expertise in sometimes narrow areas like single-use packaging or unique lighting equipment. Additionally, the industry has evolved to include more automated industrial equipment and machinery over the last decade, driving efficiencies and enabling valuable data collection. Specialty equipment distributors whose offerings keep up with these trends can take share in a still-fragmented market, but like the broader industrials sector, this space is at the whim of economic cycles that impact the capital spending and manufacturing propelling industry volumes.

Competitors in the equipment rental industry include WillScot (NASDAQ:WSC), Herc Holdings (NYSE:HRI), and United Rentals (NYSE:URI).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Custom Truck One Source grew its sales at an incredible 26.7% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Custom Truck One Source’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.6% over the last two years was well below its five-year trend.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Equipment Rental and Aftermarket Parts and Services, which are 36.6% and 8.4% of revenue. Over the last two years, Custom Truck One Source’s Equipment Rental revenue ( lifts, cranes, trucks) averaged 4.4% year-on-year declines. On the other hand, its Aftermarket Parts and Services revenue (maintenance and repair) averaged 1.4% growth.

This quarter, Custom Truck One Source’s revenue grew by 2.7% year on year to $422.2 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 11.8% over the next 12 months, an improvement versus the last two years. This projection is healthy and suggests its newer products and services will catalyze better top-line performance.

Custom Truck One Source’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 32.6% gross margin over the last five years. That means for every $100 in revenue, roughly $32.60 was left to spend on selling, marketing, R&D, and general administrative overhead.

In Q1, Custom Truck One Source produced a 20.3% gross profit margin, down 1.8 percentage points year on year. Custom Truck One Source’s full-year margin has also been trending down over the past 12 months, decreasing by 2.6 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Custom Truck One Source was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.9% was weak for an industrials business.

On the plus side, Custom Truck One Source’s operating margin rose by 4.9 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Custom Truck One Source generated an operating profit margin of 2.9%, down 1.5 percentage points year on year. Since Custom Truck One Source’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Custom Truck One Source’s full-year earnings are still negative, it reduced its losses and improved its EPS by 32.3% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Sadly for Custom Truck One Source, its EPS declined by 61.6% annually over the last two years while its revenue grew by 4.6%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Custom Truck One Source’s earnings can give us a better understanding of its performance. Custom Truck One Source’s operating margin has declined by 5.9 percentage points over the last two years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Custom Truck One Source reported EPS at negative $0.08, down from negative $0.06 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Custom Truck One Source’s full-year EPS of negative $0.14 will reach break even.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Custom Truck One Source’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10.2%, meaning it lit $10.25 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Custom Truck One Source’s margin dropped by 29.2 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business.

Custom Truck One Source burned through $56.3 million of cash in Q1, equivalent to a negative 13.3% margin. The company’s cash burn slowed from $89.93 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Custom Truck One Source historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.7%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Custom Truck One Source’s ROIC increased by 4 percentage points annually over the last few years. This is a good sign, and we hope the company can continue improving.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Custom Truck One Source burned through $242.7 million of cash over the last year, and its $1.70 billion of debt exceeds the $5.38 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Custom Truck One Source’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Custom Truck One Source until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

It was great to see Custom Truck One Source’s full-year revenue guidance top analysts’ expectations. We were also glad its full-year EBITDA guidance slightly exceeded Wall Street’s estimates. On the other hand, its revenue missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 4.5% to $3.83 immediately after reporting.

Updated: July 8, 2025 at 10:03 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Custom Truck One Source.

Custom Truck One Source doesn’t pass our quality test. To begin with, its revenue growth was mediocre over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its declining EPS over the last four years makes it a less attractive asset to the public markets.

Custom Truck One Source’s P/E ratio based on the next 12 months is 69.5x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $5.67 on the company (compared to the current share price of $5.09).