CTOS Q2 Deep Dive: Rental Demand and TES Sales Drive Outperformance, Margin Pressures Remain

Heavy equipment distributor Custom Truck One Source (NYSE:CTOS) reported Q2 CY2025 results exceeding the market’s revenue expectations, with sales up 20.9% year on year to $511.5 million. The company’s full-year revenue guidance of $2.02 billion at the midpoint came in 2.7% above analysts’ estimates. Its non-GAAP loss of $0.09 per share was significantly below analysts’ consensus estimates.

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StockStory’s Take

Custom Truck One Source’s second quarter results were well received by the market, driven by robust demand in its rental and equipment sales businesses. Management attributed the 21% revenue growth to continued strength in utility and infrastructure end markets, as well as higher equipment utilization rates. CEO Ryan McMonagle pointed out that “average utilization in the quarter was just under 78%, up almost 600 basis points versus Q2 of last year,” emphasizing the resilience of core markets and successful fleet investments. The company also saw meaningful growth in signed orders, particularly among local and regional customers.

Looking ahead, management’s full-year guidance is underpinned by expectations of sustained growth in both rental and sales segments. The company’s outlook reflects confidence in ongoing grid maintenance and infrastructure spending, as well as proactive inventory management to mitigate tariff impacts. McMonagle stated, “Our robust order flow and resilient end market demand continue to drive our expected growth across our consolidated business this year.” While management anticipates minimal direct cost impact from tariffs in 2025, they noted continued vigilance around evolving regulatory and macroeconomic factors.

Key Insights from Management’s Remarks

Management cited strong rental demand and record TES segment sales as primary drivers of the quarter’s performance, while also navigating regulatory and cost headwinds.

• Rental fleet utilization surge: The company reported a significant jump in average equipment utilization, supported by strong demand from utility contractors facing sustained electricity and infrastructure needs. Mid-70% to mid-80% utilization rates were seen across most of the fleet, which management said demonstrates “long-term resilience of our end markets.”
• TES segment sales milestones: Custom Truck achieved two consecutive months of over $100 million in TES (Truck and Equipment Sales) for the first time, with the segment posting its second highest quarter of sales ever. This was attributed to robust local and regional customer demand, with signed orders from this group up over 45% year-over-year.
• Backlog dynamics and order flow: Although backlog declined, management emphasized that strong intra-quarter order flow—especially from local and regional customers—drove overall signed order growth of nearly 35% compared to the prior year. This trend is important as it allows for more flexible inventory management and rapid delivery.
• Tariff and regulatory environment: The company proactively managed inventory purchases ahead of tariff increases and expects limited direct cost impact from tariffs in 2025. However, management noted ongoing monitoring of potential changes to emission standards and federal policies, which could influence future equipment demand and costs.
• Margin trends and fleet investment: Segment gross margins began to normalize, with rental asset sales and ongoing fleet investments supporting a higher operating margin versus the previous year. Management reiterated a commitment to investing in the rental fleet to meet projected demand, while targeting improved leverage and free cash flow by year-end.

Drivers of Future Performance

Custom Truck One Source anticipates sustained end market demand and proactive cost management to underpin guidance for the remainder of the year.

• Resilient end-market demand: Management expects continued infrastructure and grid maintenance spending to drive equipment rental and sales, particularly in the utility sector. The company’s multi-decade supplier relationships and diversified customer base are seen as supporting this sustained demand.
• Inventory and margin management: Through proactive inventory purchasing and flexible delivery, the company aims to mitigate cost impacts from tariffs and regulatory changes. Management projects further improvement in TES gross margins during the second half of the year, aided by tight cost controls.
• Leverage reduction and cash flow: Management is targeting a reduction in net leverage below 3x by the end of next year, supported by meaningful free cash flow generation. Achieving these targets hinges on disciplined capital allocation and maintaining strong order flow.

Catalysts in Upcoming Quarters

In the upcoming quarters, our team will be watching (1) whether high utilization rates and strong rental demand persist across major end markets, (2) the ability to further improve TES segment gross margins while navigating tariff and regulatory developments, and (3) progress in reducing net leverage through disciplined free cash flow generation. The outcome of pending emissions regulations and overall macroeconomic trends will also be important to monitor.

Custom Truck One Source currently trades at $5.81, up from $5.71 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free).

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