Rush Enterprises

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Rush Enterprises is a commercial vehicle retailer, providing services and products including new and used commercial trucks, aftermarket parts, repair and maintenance services, financing, and insurance.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Rush Enterprises (RUSHA) operates an extensive network of commercial vehicle dealerships across the United States and Canada. Their business model is centered around providing end-to-end solutions for commercial vehicle customers, encompassing sales, service, parts, financing, and insurance.

Here is a breakdown of their business:

  1. Commercial Vehicle Sales:
    • New Trucks: Offers a variety of new commercial trucks from major manufacturers, including Peterbilt, International, Hino, Ford, and Isuzu.
    • Used Trucks: Sells a wide selection of used commercial trucks.
  2. Aftermarket Parts:
    • Supplies a broad range of aftermarket parts, both proprietary and from other manufacturers.
    • Parts are used in repairs and maintenance.
  3. Service, Maintenance and Collision Repair:
    • Provides maintenance and repair services for all types of commercial vehicles, from minor fixes to major overhauls.
    • Collision repair services, offering comprehensive accident restoration for commercial vehicles.
  4. Financial Services:
    • Offers commercial vehicle financing through its subsidiaries.
    • Provides leasing and insurance products.

The commercial vehicle industry is cyclical, influenced by economic growth, fuel prices, interest rates, regulations and technological innovation. Some significant recent trends:

  • Increased Focus on Electric Vehicles (EVs): There is growing investment and production in EVs for commercial use due to increasing environmental regulations. Though this is gaining momentum, the commercial market still lags behind passenger vehicles and the required infrastructure is a major hurdle to adoption.
  • Technological Advancements: There is an increased adoption of technology and automation that leads to efficiency in fleet management and logistics. Telematics, autonomous features, and data analysis are gaining importance in improving customer operations.
  • Demand for Commercial Transportation: With supply chain disruptions over past years, businesses are continuing to invest in commercial vehicles for the long run.
  • Aftermarket Opportunities: The demand for aftermarket parts and services is rising, given the increasing complexity of commercial vehicles and the growing need for maintenance and repairs.

Moat Analysis

  • Network of Locations: RUSHA operates through an extensive network of strategically placed dealerships and truck centers that offers better convenience to its customers. These facilities are also positioned along important transport routes for ease of access.
  • Brand Relationships: Rush has established strong relationships with several major truck manufacturers like Peterbilt, International, Hino, Ford, and Isuzu. These long standing connections help RUSHA to maintain a good product selection, obtain preferential inventory and negotiate favorable terms, giving them a competitive edge over other retailers.
  • Integrated Services: The business model that offers a wide range of services encompassing sales, parts, finance, maintenance and insurance serves as a significant advantage over companies that only sell one of these, making it more sticky and convenient for the customer.

Given these, I would give a moat score of 3/5.

Risk to Moat

  • Cyclicality: The commercial vehicle industry is sensitive to economic fluctuations. During economic downturns, demand for trucks and aftermarket parts will decline.
  • Competition: New entrants into the parts market and pressure from OEM parts providers and e-commerce options can erode market share.
  • Technological Disruption: Rapid technological shifts in commercial vehicles and related systems could render current offerings obsolete. For example, adoption of electric vehicle and autonomous trucking technology could change dynamics, especially if other companies are able to get ahead of those.
  • Supply Chain Disruption: Disruptions from global events or natural disasters can affect their supply chains. For example, the shortage of chips has had huge impact on the automobile market in recent years.
  • Regulation: Government regulation of transportation and fuel efficiency can lead to higher costs.

Resilience

  • Service Driven Business: Services such as maintenance, repair, financing, and insurance are necessary to support the vehicles sold. These create a recurring revenue stream, providing some downside resilience to the business.
  • Parts Business: Selling of parts is a continuous business since the parts of vehicles will fail.
  • Long Term Relationships: Having long standing relationships with customers and various manufacturers that gives some degree of downside support.

Financial Deep-Dive

Let’s do an in-depth analysis of RUSHA’s financials, mainly relying on latest documents and earnings calls.

Revenue Analysis

The total revenues are made up of new and used commercial vehicles sales, aftermarket parts, service and maintenance and Financial Services segments. Here are some interesting details about them:

  • New and used commercial vehicles sales:
    • Revenues were $1.9 billion in Q3 2023 and the 23Q total revenue was $6.39 Billion compared to 5.25 Billion in 2022, due to increased market share and increased demand.
    • The company has been focusing more on medium and heavy-duty trucks, also the average selling price of vehicles has increased. The company intends to emphasize increasing the market share.
    • Management stated that there were some slowdown in demand, and they anticipate to have a flat sale volume for next year.
  • Aftermarket Parts:
    • The business of selling parts constitutes for $692 million revenue in Q3 2023. Aftermarket parts have continued to be a growing revenue center, where their service segment will also have some good results.
  • Service and Maintenance:
    • The service segment generated revenue of $568 million in Q3 2023, due to higher volume and also some increase in parts revenue. Management emphasized that there was some slowdown in the market but they still expect reasonable demand for maintenance and repair of commercial vehicles.
  • Financial Services:
    • Finance and insurance revenue was $68 million in the last quarter. Their goal is to provide credit and insurance solutions for their customers and they expect to continue to see more demand.

Here is some more data, taken from their latest report:

Metric 2023 (9 Mo) 2022 (9 Mo) YoY Change
New truck revenue (in millions) $4,122.9 $3,242.8 +27.1%
Used truck revenue (in millions) $1,172 $1,068.6 +9.6%
Parts revenue (in millions) $2,041.3 $1,849.8 +10.3%
Service & body shop revenue (in millions) $1,624.8 $1,460.1 +11.3%
Financial services revenue (in millions) $198.5 $171.6 +15.6%
  • Overall, Rush Enterprises has seen good top-line growth, which is primarily fueled by increased new and used vehicle sales.
  • Parts and service revenues are growing steadily, suggesting consistent demand for the company’s aftermarket services.
  • Financial Services revenue, while smallest compared to the others, shows a high percentage growth.

Profitability and Margins

  • Gross Profit: The company’s gross profit was $1.15 Billion in the first three quarters of 2023, an increase of 15%. Gross profit for new vehicles increased the most because the margins were higher than before.
  • Operating Expenses: Operating expenses totaled $949.2 million for the nine months ended September 30, 2023, or 17.7% of revenue. These include expenses such as selling, general and administration expenses, personnel and interest expenses.
  • Net Income: RUSHA’s Net income was $207 million in the first three quarters of 2023, compared to $223 million in the same period of 2022. The decline was caused primarily by changes in market conditions, which led to higher interest expenses and low gross profits, especially in Q3.
  • Margins: Operating margin for new and used vehicles was at 5.4% due to lower used truck margins. Aftermarket services margins were at 29.3% and financial services margins were at 21.1%

While the company has shown revenue growth, it has experienced margin contractions. Management has acknowledged that their expenses have increased substantially and are working to improve cost control.

Balance Sheet

The balance sheet was reviewed to determine the following:

  • Cash: The amount of cash is at $230 million as of 2023 Q3. The cash position seems moderate for business.
  • Inventory: The inventory is approximately $1.3 Billion, since they have to maintain a certain inventory of trucks, parts, etc.
  • Long-term Debt: The company has a substantial amount of debt at $1.39 billion and a debt to equity ratio of 1.75. Given the cyclicity of the industry, this is a high debt to equity ratio.
  • Goodwill: Goodwill of 430 million is more than 20% of the total assets, indicating the acquisitions are not completely efficient.

Based on this, I would rate their balance sheet health as a 3/5.

Understandability Rating:

The complexity of the business model and financial statements earns a 2/5 for understandability.

  • Business Model: While the core business of selling, servicing, and financing vehicles is relatively easy to grasp, the different complexities of operating in different segments and financial structures makes its overall business model less easy to understand.
  • Financials: While the business model and income statements are relatively straightforward, the balance sheet of RUSHA is quite difficult to dissect without strong knowledge of accounting and finance. The different accounting treatments of loans, leases and other special items, make their financials tough to understand.
  • Cyclicality: Cyclicality of this business and the various macroeconomic factors affecting it, require experience and knowledge of this specific sector to accurately assess it.

Recent Concerns and Controversies

Management stated that the sales are slowing down. Management has also increased prices of certain vehicles which has a double edged effect of improving sales margins but simultaneously causing a reduction in sales volume. Moreover, the interest expense had increased, putting a dent in the net profit. Although, they are focused on reducing costs, this is putting a damper on the short-term growth for now. Management expects a flat revenue for 2024.

In the Q3 2023 earnings call, a recurring theme was to increase the parts and service revenue segments. The parts and service segment has high profit margins and is less volatile than the commercial vehicles sales. This is why the management has put some focus on growing those divisions. They also acknowledge that the growth of electric vehicles is coming along, but they don’t see any major impact in the near term.

Conclusion:

Rush Enterprises is a robust commercial vehicle retailer with a solid presence, a wide range of services, and strong connections with major manufacturers. However, it faces industry-specific and macroeconomic risks that can hinder growth and profitability. While its scale and vertical integration are moats, the company does not have any strong differentiating factor that leads to high economic profits. The company needs some work in improving its balance sheet strength and cost control. A careful assessment of market conditions, company-specific financial risks and a sound business model should be done by intelligent investors.