Executive Summary / Key Takeaways

• Secular Tailwind Becomes Financial Reality: CTOS sits at the epicenter of a $600 billion utility transmission and distribution CapEx cycle through 2029, driven by AI data center power demand and electrification. This isn't a cyclical upswing—it's a structural reset in electricity infrastructure spending that transforms the company's earnings power.
• Two-Engine Model Hits Inflection Point: The Equipment Rental Solutions (ERS) segment is accelerating while Truck and Equipment Sales (TES) faces temporary headwinds, creating a classic margin mix shift story. ERS gross margins expanded 370 basis points to 62% in Q3 2025, while TES margins compressed to 15% from industry oversupply. The "so what" is that CTOS is becoming a higher-quality, recurring-revenue business at exactly the right moment.
• Capital Allocation Pivot Signals Strategic Maturity: Management is simultaneously accelerating rental fleet investment (CapEx raised to $250M) to capture secular demand while aggressively deleveraging (targeting <3x net leverage by end of 2026). This disciplined approach—rare in industrial companies—suggests a focus on return on invested capital rather than growth at any cost.
• Valuation Disconnect Creates Asymmetric Risk/Reward: Trading at 0.75x sales and 4.24x operating cash flow, the market prices CTOS as a cyclical equipment distributor, not a specialized infrastructure rental platform with 79% fleet utilization and 17% OEC growth. The stock offers downside protection through asset value and secular demand, with upside leverage to margin normalization and deleveraging.
• Critical Variables to Monitor: The investment thesis hinges on three factors: (1) sustained rental utilization above 78% to drive pricing power, (2) TES margin recovery to the 15-18% target range as industry inventory clears, and (3) successful execution of the $125-150M inventory reduction plan to reach sub-4x leverage by year-end 2025.

Setting the Scene: The Infrastructure Bottleneck Becomes a Business Model

Custom Truck One Source, founded in 1988 and headquartered in Kansas City, Missouri, has spent three decades building what most industrial companies never achieve: a defensible niche at the critical intersection of specialized equipment and mission-critical infrastructure. The company provides aerial lifts, digger derricks , service trucks, and forestry equipment to electric utilities, telecommunications providers, railroads, and waste management companies across North America. This isn't general construction equipment—it's purpose-built machinery for maintaining and expanding the power grid.

The business operates through three integrated segments that create a powerful ecosystem effect. Equipment Rental Solutions (ERS) owns a fleet of over 10,350 units with an original equipment cost (OEC) exceeding $1.62 billion, generating recurring revenue through rentals and used equipment sales. Truck and Equipment Sales (TES) sells new equipment, primarily through the company's Load King manufacturing brand, capturing the equipment purchase cycle. Aftermarket Parts and Services (APS) provides maintenance, repair, and specialized tools, creating customer stickiness and high-margin revenue streams.

This integrated model matters because it solves the core problem facing utility contractors: capital allocation uncertainty. When a utility faces a major transmission project, it can rent specialized equipment from CTOS rather than commit millions to purchases. When that same contractor needs to expand its fleet permanently, CTOS can sell them new or used equipment. When the equipment needs maintenance, CTOS provides the parts and service. This one-stop-shop approach builds deep customer relationships in a highly regulated, safety-conscious industry where switching costs are substantial.

The industry structure has fundamentally shifted. While most investors focus on AI chip demand or data center construction, the real bottleneck is electricity delivery. As management noted, "the real bottleneck in the AI build-out is electricity." Industry projections estimate U.S. electricity demand will grow 24-29% by 2035, nearly double previous forecasts. This translates to $600 billion in transmission and distribution CapEx from 2025-2029, with transmission spending alone growing over 15% annually. CTOS doesn't just benefit from this trend—it provides the essential equipment to make it possible.

Technology, Products, and Strategic Differentiation: The Youth Advantage

CTOS's competitive moat rests on three pillars that competitors cannot easily replicate: fleet specialization, geographic reach, and asset age. The company's rental fleet averages just under three years old—management believes it's the youngest utility rental fleet in the industry. Why does fleet age matter? Because newer equipment means higher reliability, lower maintenance costs, and the ability to command premium rental rates. Utility contractors working on critical infrastructure cannot afford downtime, making them willing to pay for reliability. This shows up in the numbers: ERS rental margins reached nearly 76% in Q3 2025, driving the segment's overall gross margin to 62%.

The Load King manufacturing arm provides another layer of differentiation. While competitors like United Rentals (URI) and Herc Holdings (HRI) primarily distribute third-party equipment, CTOS can customize vehicles for specific utility applications. This capability proved valuable when the company unveiled its "Outback Series" of tracked easement machines at Utility Expo 2025—equipment designed specifically for challenging terrain where utilities must build transmission lines. Customization creates switching costs because customers who standardize on Load King equipment develop maintenance expertise and parts inventories specific to those vehicles.

Geographic expansion reinforces the moat. The company opened a new Orlando, Florida location on October 1, 2025, and plans a Portland, Oregon branch opening in June 2025. These aren't random locations—they're strategic hubs serving high-growth utility markets. Florida faces unique challenges from hurricane resilience requirements, while the Pacific Northwest is seeing major transmission projects to connect renewable energy sources. By establishing physical presence in these markets, CTOS builds local relationships and reduces transportation costs, making it harder for national generalists to compete on price.

The integrated APS segment completes the ecosystem. While competitors treat parts and service as an afterthought, CTOS's specialized tools and mobile technicians generate 26% gross margins and create a feedback loop: customers who rely on CTOS for maintenance are more likely to rent or buy their next piece of equipment from the same provider. This network effect is subtle but powerful in an industry where equipment uptime can make or break a contractor's profitability.

Financial Performance & Segment Dynamics: The Mix Shift Accelerates

Third quarter 2025 results reveal the strategic inflection point in stark detail. Consolidated revenue grew 8% year-over-year to $482 million, but adjusted EBITDA surged 20% to $96 million. This 12-point gap between EBITDA and revenue growth signals powerful operating leverage—exactly what you want to see in a business scaling its high-margin segments. The "why" behind this leverage is the mix shift toward ERS and operational efficiency gains.

The ERS segment is firing on all cylinders. Revenue grew 12% to $169 million, but gross profit jumped 18% to $50 million, expanding margins by 370 basis points to 62%. This margin expansion came from two sources: a higher mix of rental revenue (which carries 76% margins) and improved rental margins themselves. Average OEC on rent reached $1.26 billion, up 17% year-over-year, while fleet utilization hit 79%—up 600 basis points and the highest level in over two years. The on-rent yield of 38.2% demonstrates pricing power in a tight market.

What does this mean for investors? It shows that CTOS is getting more revenue and profit from every dollar of fleet investment. The company accelerated rental fleet CapEx to $79 million in Q3, positioning for 2026 growth. This isn't reckless spending—it's strategic deployment into a market where utilization and yields are rising simultaneously. Management expects ERS to finish 2025 in the upper half of its $660-690 million guidance range, suggesting continued momentum.

The TES segment tells a different but equally important story. Revenue grew 6% to $275 million, but gross profit declined 1% as margins compressed to 15%. The culprit is industry-wide inventory of vocational vehicles, which remains elevated and creates pricing pressure. However, the underlying demand picture remains robust. Signed orders from local and regional customers surged over 40% year-over-year in Q3, driving overall order growth above 30%. Backlog decreased to $280 million from $396 million a year ago, but management emphasizes that TES is an "order-driven business" not a "backlog-driven business." Intra-quarter order flow remains strong, with backlog already rebounding to over $350 million early in Q4.

The critical insight for investors is that TES margin pressure is cyclical, not structural. The company is gaining market share (evidenced by strong order growth) while absorbing temporary margin compression. As industry inventory clears and supply normalizes, TES margins should recover to the 15-18% target range. This creates a potential earnings catalyst that the market hasn't priced in. The segment's record performance—two consecutive months over $100 million in Q2, strongest March in history—demonstrates underlying demand strength.

APS provides stability. Revenue grew 3% to $38 million, but gross profit jumped 23% as margins expanded to over 26%. This segment's mid-20% margin profile and steady growth act as a ballast for the overall business, generating cash flow that supports fleet investment and debt reduction.

Capital Allocation & Strategic Pivot: From Growth to Quality

CTOS's management team is executing a sophisticated capital allocation strategy that signals a maturing business focused on returns rather than mere expansion. The company closed a sale-leaseback transaction on eight properties in Q4 2024, generating $52 million in net proceeds that were used to reduce debt. This transaction unlocked real estate value while maintaining operational control of the facilities. The incremental lease expense of $4.5-5 million annually is more than offset by interest savings and improved capital efficiency.

In January 2025, CTOS and Platinum Equity jointly purchased 8.14 million shares from Energy Capital Partners at $4.00 per share—a 23% discount to the market price. This $32.6 million transaction reduced the share count by approximately 3.5% at an attractive valuation, demonstrating management's willingness to act opportunistically on behalf of shareholders. The shares are held in treasury, providing flexibility for future deployment.

The most significant capital allocation decision is the increased investment in the rental fleet. Management raised 2025 net rental CapEx guidance from under $200 million to approximately $250 million, citing sustained demand in ERS. This isn't empire-building—it's responding to clear market signals. With utilization at 79% and climbing, and on-rent yields at 38.2%, every dollar invested in fleet generates immediate, high-margin returns. The fleet age remains just below three years, positioning CTOS to capture premium pricing for reliable, modern equipment.

Simultaneously, the company is executing an aggressive inventory reduction plan. After reducing inventory by $54 million in Q3 2025, management targets an additional $110-135 million reduction in Q4, aiming for total 2025 reduction of $125-150 million from year-end 2024 levels. This directly reduces floorplan borrowings, which decreased $57 million in Q3. The goal is reaching six months of whole goods inventory by end of 2026, down from elevated levels that built up during supply chain disruptions.

The leverage reduction strategy is working. Net leverage improved from 4.8x at Q1 2025 to 4.66x at Q2 and 4.53x at Q3. Management targets meaningful movement by year-end, potentially approaching 4.0x if they hit the high end of inventory reduction targets. The ultimate goal is sub-3x leverage by end of fiscal 2026. This matters because it reduces financial risk, lowers interest expense, and positions CTOS to weather cyclical downturns while competitors struggle with overleveraged balance sheets.

Outlook, Guidance, and Execution Risk

Management has consistently reaffirmed 2025 guidance: total revenue of $1.97-2.06 billion and adjusted EBITDA of $370-390 million. This implies EBITDA margins of 18.8-18.9%, up from approximately 18% in 2024. The confidence behind this guidance stems from unprecedented visibility into utility spending patterns and strong intra-quarter order flow.

The segment-level guidance reveals the strategic priorities. ERS is expected to finish in the upper half of its $660-690 million range, implying Q4 revenue of $166-181 million (versus $169 million in Q3). This suggests management sees sustained rental demand through year-end. TES is expected to finish near the lower end of its $1.16-1.21 billion range, reflecting continued margin pressure but stable volume. APS should hit its $150-160 million target, providing steady cash generation.

Key assumptions underpinning this guidance are reasonable but require monitoring. Management assumes successful mitigation of tariff impacts through tactical inventory purchases and supplier negotiations. They also assume no significant pre-buy activity related to EPA or CARB emission standard changes, which could distort TES demand. Most importantly, they assume sustained utility contractor activity driven by the secular electricity demand growth.

CEO Ryan McMonagle's commentary on 2026 visibility is telling: "we're seeing really good demand in the utility sector and transmission and distribution... it does feel like we're heading into a strong cycle of transmission demand." This forward-looking statement, combined with the accelerated rental fleet investment, suggests management is positioning for multi-year growth, not just a 2025 bounce.

The execution risks are real but manageable. The company must deliver on its $110-135 million Q4 inventory reduction while maintaining TES customer relationships. It must balance rental fleet investment with free cash flow generation. And it must navigate tariff uncertainty and interest rate headwinds without sacrificing margin. The good news: management has demonstrated tactical flexibility, pulling forward inventory purchases in Q1 to mitigate tariff impacts and using the rental fleet as a hedge when customers hesitate to buy.

Risks and Asymmetries: What Could Break the Thesis

The primary risk is leverage. At 4.53x net debt to EBITDA, CTOS has limited financial flexibility. If utility demand softens unexpectedly or TES margins compress further, the company could face covenant pressure and reduced ability to invest in growth. However, the trend is positive—leverage has improved 270 basis points since Q1—and management has clear line of sight to sub-4x by year-end. The sale-leaseback and inventory reduction demonstrate commitment to deleveraging.

TES margin pressure represents a cyclical risk that could become structural if industry inventory remains elevated. The supply of vocational vehicles across the market is creating pricing pressure that compressed TES gross margin to 15% in Q3. While management expects normalization, a prolonged oversupply could delay margin recovery into 2026 or beyond. The asymmetry here is that any sign of margin stabilization would likely drive significant earnings upside, as the market currently prices in continued compression.

Customer hesitancy among smaller buyers, driven by high interest rates and tariff uncertainty, could slow TES growth. Management acknowledges this dynamic but notes that the rental fleet serves as a hedge—customers who delay purchases often shift to rentals. This flexibility is a key differentiator versus pure-play equipment sellers. The risk is that prolonged economic uncertainty could eventually impact rental demand, though utility infrastructure spending is less cyclical than general construction.

Tariff policy remains an wildcard. While management believes mitigation actions limit direct cost impact, continued trade uncertainty could affect customer psychology and supply chain planning. The company's diversified supplier base (30% of purchases from Mexico/Canada) and tactical inventory positioning provide some protection, but a major trade disruption would pressure margins across all segments.

On the upside, several asymmetries favor investors. Faster-than-expected inventory reduction could drive leverage below 4.0x by year-end, unlocking multiple expansion. TES margin recovery could begin earlier than expected if industry production cuts reduce supply. And the secular electricity demand story could accelerate if AI data center buildout intensifies, driving even stronger rental utilization and pricing.

Competitive Positioning: Winning the Niche

CTOS competes against much larger players but wins through specialization. United Rentals, with $52 billion market cap and over 1,500 locations, dominates general equipment rental but lacks CTOS's utility-specific expertise. URI's gross margins of 39% and operating margins of 26% are superior overall, but CTOS's 62% ERS margins show the power of niche focus. When a utility needs a digger derrick with specific reach and safety features for a transmission line project, CTOS's specialized fleet and expertise beat URI's scale.

Herc Holdings, with $4.8 billion market cap, focuses on construction and industrial equipment. Its recent acquisition of H&E Equipment Services expanded scale but added integration risk. HRI's 34% gross margins and 16% operating margins are solid, but its exposure to general construction makes it more cyclical than CTOS's utility-focused model. The infrastructure boom helps both, but CTOS's specialization in T&D work provides more predictable demand.

Alta Equipment Group (ALTG), at just $159 million market cap, is struggling with revenue declines and compressed margins. CTOS's 7.8% revenue growth and 20% EBITDA growth in Q3 dramatically outpace ALTG's performance, demonstrating the value of strategic focus. ALTG's generalist approach and higher debt burden (420x debt-to-equity) show what happens when industrial dealers lack differentiation.

CTOS's moats are tangible. The specialized fleet, with average age under three years, generates higher utilization and pricing than generalist competitors. The integrated model creates customer lock-in. And deep utility relationships, built over decades, provide visibility into project pipelines that competitors can't match. The risk is that larger players could invest in utility-specific fleets, but the capital requirements ($1.6 billion OEC) and time needed to build expertise create high barriers to entry.

Valuation Context: Pricing for Imperfection

At $6.45 per share, CTOS trades at a market capitalization of $1.46 billion and an enterprise value of $3.94 billion. The valuation metrics reveal a market skeptical of the company's transformation:

• Price-to-sales: 0.75x - This is a cyclical industrial multiple, not a rental equipment multiple. URI trades at 3.27x sales, reflecting its scale and margins. HRI trades at 1.24x sales. CTOS's discount suggests the market views it as a distributor, not a rental platform.
• EV/EBITDA: 21.68x - This appears high but reflects depressed EBITDA from TES margin pressure. As margins normalize and EBITDA grows toward the $370-390 million guidance range, this multiple would compress to 10-11x, more reasonable for an industrial company with secular tailwinds.
• Price/operating cash flow: 4.24x - This is the most attractive metric, showing the market isn't fully valuing the cash generation potential. With $262 million in operating cash flow year-to-date and fleet investment peaking, free cash flow should inflect positively in 2026.

• Debt-to-equity: 3.17x - Elevated but improving. The leverage reduction plan should bring this down significantly by 2026.
• Return on assets: 2.32% - Low but improving as asset utilization increases and margins expand.

The valuation disconnect is clear: the market sees a cyclical equipment company with leverage risk, while the business is becoming a higher-margin, recurring-revenue platform with secular growth drivers. This creates opportunity for investors willing to look through near-term TES margin pressure to the underlying earnings power of the ERS segment.

Conclusion: The Infrastructure Play No One's Talking About

Custom Truck One Source is executing a strategic transformation that the market has yet to recognize. The company is shifting from a cyclical equipment seller to a specialized rental platform with utility-like characteristics, just as a $600 billion infrastructure supercycle begins. The financial evidence is compelling: 20% EBITDA growth on 8% revenue growth, 370 basis points of ERS margin expansion, and fleet utilization at two-year highs.

The capital allocation strategy—accelerating rental fleet investment while aggressively deleveraging—demonstrates management's focus on returns over growth. The sale-leaseback, opportunistic share repurchase, and inventory reduction plan all point to a team that understands capital efficiency. This discipline, combined with the secular tailwind, creates a favorable risk/reward profile.

The thesis faces real risks. Leverage at 4.53x limits flexibility. TES margin pressure could persist longer than expected. Tariff and interest rate uncertainty could slow customer spending. But these risks are mitigated by the company's specialized moat, integrated business model, and the non-discretionary nature of utility infrastructure spending.

The critical variables to monitor are clear: rental utilization must stay above 78% to support pricing power, TES margins must recover toward 17% as industry inventory clears, and leverage must approach 4.0x by year-end. If CTOS executes on these fronts, the valuation gap should close as the market recognizes the quality of the rental earnings stream.

For investors, CTOS offers exposure to the AI infrastructure buildout through a mission-critical equipment provider trading at cyclical valuations. The downside is protected by hard assets and secular demand. The upside is levered to margin expansion, deleveraging, and multiple re-rating. In an infrastructure market obsessed with data centers and semiconductors, the company that literally builds the grid is being overlooked. That won't last forever.