Morningstar | Rush Continues to Ride the Wave of Strong Demand for Commercial Trucks. See Updated Analyst Note from 28 Oct 2018
No-moat Rush realized strong demand for commercial trucks in the third quarter, expanding truck sales by 7.3% year over year and overall revenue by 9.4%. This increase was despite lapping large fleet orders that occurred in third-quarter 2017. Even more impressive was used truck sales, which were up 26% year over year. Third-quarter EPS of $1.03 handily beat the consensus estimate of $0.89. Strong performance across all segments of the business lifted operating margin to 4.3% from 3.8% in the prior-year quarter. Following these ongoing performance improvements, we are raising our fair value estimate to $52 from $46.Rush paid out its first ever quarterly dividend of $0.12 per share during the quarter. Despite returning cash to shareholders in terms of a dividend and repurchasing $12 million worth of stock, management wants to keep a “bullet in the holster†so cash is available for expansion opportunities. During the quarterly call, management reiterated its desire to increase market share in Class 8 to 7.5% from its current 6% by 2022. Likewise, it hopes to increase its market share of medium duty trucks to 6.2% from 5% in the same time frame.
We believe Rush’s strategy is on track, putting it poised to capture greater market share and sell more parts and services. In the third quarter, aftermarket parts and service revenue was up 14% year over year. As Rush continues to ramp up its higher-margin service offerings, it added 60 technicians during the quarter bringing the trailing 12 month new hires to 300. It is also expanding service hours in many locations. This is especially impressive given the tightness in the labor market, which affects recruitment of both salespeople and technicians.
All told, Rush is poised to benefit from the ongoing surge in commercial truck sales, which we expect to last well into 2019. While we believe that the company has more to demonstrate in terms of improved operating margins, we maintain our belief that the company’s shares have upside as shares currently trade well below our fair value estimate.
Rush Enterprises is a retailer of commercial vehicles and related services. The Truck Segment includes the company's operation of network of commercial vehicle dealerships under the name Rush Truck Centers. Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, Mitsubishi Fuso, IC Bus or Blue Bird. Through its network of Rush Truck Centers, the company provides one-stop service for the needs of its commercial vehicle customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products.
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