Custom Truck One Source: 3 Key Takeaways for Long-Term Investors

Custom Truck One Source (CTOS) boosted its earnings forecast for 2026 in its latest third-quarter 2026 earnings call, marking the third time this year that management had increased guidance. The company's decision to allocate capital towards high-yield rental assets over short-term cash flow demonstrates strong confidence in multiyear utility spending.

This strategic move resulted in levered free cash flow nearing zero for 2026, but management anticipates $15 million in annual earnings before interest, taxes, depreciation, and amortization (EBITDA) starting in 2027.

To meet increased demand from utility customers, CTOS redirected assembly line capacity from its Equipment Manufacturing and Sales (STEM) segment to internal fleet operations. This decision led to a 5% decline in third-party STEM segment revenue to $283 million in the third quarter, favoring recurring rental cash flow over immediate sales revenue.

Management's focus on meeting demand and optimizing production for rental investment has resulted in heavy utility spending on transmission lines, pushing fleet utilization above 81% and increasing original equipment cost (OEC) to $1.76 billion at the quarter's end.

The operational scale generated 79% rental gross margins in the Specialized Equipment Rental (SER) segment, indicating that price increases continue to hold. Adjusted rental gross margin for the quarter was approximately 79%, surpassing the previous quarter's mid-seventies range due to high utilization, accumulated price increases, and cost control efforts.

With an order backlog nearing $400 million by the fourth quarter's start, management expects higher rental yields and expanding production capacity to drive compounding earnings growth. The company targets a net leverage ratio below 4x by the end of 2026, with a long-term goal of maintaining leverage under 3x in 2027.