CTOS Q3 Deep Dive: Utility Sector and Rental Fleet Investments Shape Outlook

Heavy equipment distributor Custom Truck One Source (NYSE:CTOS) missed Wall Street’s revenue expectations in Q3 CY2025, but sales rose 7.8% year on year to $482.1 million. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $2.02 billion at the midpoint. Its GAAP loss of $0.03 per share was in line with analysts’ consensus estimates.

Is now the time to buy CTOS? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Custom Truck One Source’s third quarter results were met with a negative market reaction, as revenue came in below Wall Street’s expectations despite a nearly 8% year-over-year increase. Management attributed the results to continued solid demand from utility and transmission and distribution (T&D) markets, as well as strong execution in both Equipment Rental Solutions (ERS) and Truck and Equipment Sales (TES) segments. CEO Ryan McMonagle emphasized that “steady business activity and strong intra-quarter order flow continue to reinforce our optimism about achieving our expected growth targets in 2025.” The company also pointed to rental fleet utilization rates reaching their highest level in two years and highlighted strategic investments in rental fleet capacity to meet ongoing demand.

Looking ahead, Custom Truck One Source’s forward guidance is driven by expectations of sustained demand in the utility sector, underpinned by secular trends in electricity and grid infrastructure investment. Management is prioritizing increased capital expenditures in the rental fleet and production capacity to support anticipated growth, especially in transmission projects. CFO Christopher Eperjesy stated that “incremental CapEx will yield strong returns that will result in higher sustained levels of levered free cash flow going forward.” The company expects these trends, combined with accelerated depreciation provisions and strong order flow, to support revenue and profitability targets despite macroeconomic uncertainty.

Key Insights from Management’s Remarks

Management cited robust utility sector activity, strong rental utilization, and ongoing investments in fleet and production capacity as primary drivers of the quarter. They also acknowledged some inventory and margin pressures linked to broader market dynamics.

• Utility sector momentum: CEO Ryan McMonagle noted sustained high demand from utility contractors, with particular strength in transmission and distribution projects. This demand has led to increased rental fleet utilization and higher order flow, positioning the company well for future quarters.
• Rental fleet investments: To capitalize on demand, Custom Truck accelerated capital spending on its rental fleet, resulting in its highest-ever quarter-end original equipment cost (OEC) on rent and average utilization exceeding 79%. Management believes this positions the business to capture growth opportunities in 2026 and beyond.
• Order flow and backlog trends: While TES backlog declined during the quarter due to strong sales activity and market equipment availability, management highlighted a 40% increase in signed orders from local and regional customers and a more than 30% rise in overall orders. Intra-quarter order flow is now a key indicator for management, reflecting the shift to shorter ordering cycles.
• Margin dynamics and pricing: Segment gross margins in TES declined slightly due to elevated market supply and competitive pricing pressures. However, ERS segment margins expanded, supported by higher rental revenue mix and improved rental asset sale margins. Management expects TES margins to improve as market supply balances out.
• Tariff and macroeconomic impacts: Management indicated that prior mitigation efforts have limited the direct cost impact of tariffs, but acknowledged that economic uncertainty, elevated interest rates, and ongoing inflation contribute to customer hesitancy, particularly in certain infrastructure segments like refuse and dump trucks.

Drivers of Future Performance

Custom Truck expects continued growth to be driven by utility infrastructure investment, increased rental fleet deployment, and improved production capacity, while monitoring risks from economic uncertainty and inventory management.

• Utility market expansion: Management views ongoing secular trends in U.S. electricity demand and grid modernization as major growth drivers, with projected T&D capital expenditures from utilities supporting robust demand for rental and sales equipment. Transmission projects, in particular, are expected to sustain high utilization and pricing opportunities.
• Rental fleet and production capacity: The company is investing in rental fleet growth and expanding manufacturing capacity at its Kansas City location. These initiatives are intended to support higher volumes in both ERS and TES segments, improve responsiveness to customer needs, and mitigate supply chain or tariff impacts.
• Inventory and cash flow management: Management expects to reduce inventory levels by $125 million to $150 million by year-end, targeting improved free cash flow and net leverage below 3x by the end of next year. However, the timing of inventory reduction relative to capital investments may temporarily pressure free cash flow, with the expectation of long-term improvement as growth initiatives mature.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will closely watch (1) the pace of rental fleet deployment and utilization in response to utility sector demand, (2) the company’s ability to manage inventory and deliver improved free cash flow as CapEx investments peak, and (3) evolving order flow and backlog trends in TES, particularly among local and regional customers. The trajectory of T&D project activity and macroeconomic conditions will also be important signposts for Custom Truck’s performance.

Custom Truck One Source currently trades at $5.85, down from $6.76 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free for active Edge members).

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