We came across a bullish thesis on Custom Truck One Source (CTOS) on Value Degen’s Substack by Unemployed Value Degen. In this article we will summarize the bulls’ thesis on CTOS. Custom Truck One Source share was trading at $3.7 as of Sept 6.
A fleet of trucks carrying recyclable materials, highlighting the company’s transfer services.
Custom Truck One Source (CTOS) is positioned to benefit from the anticipated infrastructure buildout driven by the Artificial Intelligence revolution, although the pace of this transformation has been slow. As an equipment dealership specializing in trucks for electrical infrastructure, CTOS boasts a fleet of over 10,000 vehicles. Despite its aggressive revenue growth, the company has faced challenges due to a significant inventory build-up over the past two years, which has adversely affected its financial performance.
The Biden administration’s infrastructure bill, which allocates $420 billion for infrastructure projects, represents a major tailwind for CTOS. However, management indicates that clients are hesitant to mobilize until interest rates decrease. The process for federal funds to reach state governments and for projects to be authorized and bid out is lengthy, delaying new orders for CTOS. Nevertheless, the company has proactively increased its inventory in anticipation of future demand.
Another favorable factor is the improved fiscal health of state and municipal governments following COVID-19 inflation, which has allowed them to take on more debt for infrastructure projects. State Department of Transportation budgets for 2024 are projected to be 11% higher than in 2023, following a 13% increase from 2022. While this earmarked spending has yet to translate into business for CTOS, it is expected to materialize in the coming quarters.
CTOS has seen encouraging insider buying, particularly from private equity firms that hold substantial stakes in the company. However, the presence of multiple private equity owners raises concerns about potential future sell-offs that could depress share prices. The majority stakeholder, Platinum Equity, acquired CTOS in 2021, and with their typical exit strategy of five years, a sale could be anticipated around 2026. This aligns with their recent successful sale of another company, YAK Access, for $1.1 billion, suggesting a strategy focused on maximizing shareholder value.
Comparatively, CTOS’s price-to-sales ratio stands at approximately 0.51, significantly lower than its competitor United Rentals (URI) at 3.15. This valuation discrepancy, alongside CTOS’s growth potential in the AI and infrastructure sectors, suggests the possibility of a 4x to 6x return in the coming years. However, the ongoing capital expenditures for fleet expansion could also lead to a potential 40% drawdown in stock price.
Overall, CTOS is a company to monitor closely, as it may present a compelling investment opportunity once the market conditions become more favorable.
Custom Truck One Source is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 8 hedge fund portfolios held CTOS at the end of the second quarter which was 13 in the previous quarter. While we acknowledge the potential of CTOS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as CTOS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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