CTOS Q3 deep dive: rental fleet expansion drives future growth as backlog surges

Heavy equipment distributor Custom Truck One Source (NYSE:CTOS) fell short of the market’s revenue expectations in Q3 2026 as sales rose 2.7% year on year to $495.2 million. On the other hand, the company’s full-year revenue guidance of $2.15 billion at the midpoint came in 1.2% above analysts’ estimates. Its non-GAAP profit of $0.01 per share increased from -$0.03 in the same quarter last year.

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 was marked by strong performance in its rental business, which management credited to continued high demand in the transmission and distribution (T&D) end markets. CEO Ryan McMonagle highlighted record rental fleet utilization and increased fleet investments, stating, “We believe that we are in the early stages of what could be a once in a generation transmission demand super cycle.” Despite sales growth, the company’s results missed Wall Street’s revenue expectations, mainly due to delayed equipment deliveries and a strategic shift toward prioritizing fleet expansion over third-party sales.

Looking forward, management’s guidance is driven by confidence in sustained demand across T&D markets and the impact of ongoing fleet investments. McMonagle pointed to “long duration projects” and strong customer backlogs as drivers for future earnings, while CFO Christopher J. Eperjesy noted that additional rental fleet spending will support continued growth into 2027. The company expects delayed third-party sales to recover in the fourth quarter, and believes that robust demand and pricing opportunities will help offset cost pressures related to supply chain and regulatory changes.

Key insights from management’s remarks

Management attributed the quarter’s performance to elevated rental demand, strategic capital allocation, and operational execution in response to shifting customer needs and external supply challenges.

• Rental business momentum: The SER segment saw record utilization rates and fleet investment, driven by high demand from T&D customers. Management noted that “OEC (original equipment cost) on rent” and utilization reached historically high levels, reflecting robust project activity and a young, competitive fleet.
• Capital allocation shift: Leadership made a deliberate choice to increase rental fleet investments, redirecting production capacity to meet long-term demand. This resulted in a temporary reduction in levered free cash flow for 2026 but is expected to generate meaningful adjusted EBITDA contributions in 2027.
• Third-party sales timing: Delays in third-party equipment sales—caused by a chassis vendor recall and weather-related inventory damage—impacted reported revenue. Management expects these to be short-term timing issues, with most delayed sales recognized in the following quarter.
• Backlog growth: The order backlog ended the quarter at $342 million, up 22% year over year. Management cited strong customer order flow in T&D and distribution, supporting their outlook for continued revenue growth.
• Pricing discipline and margin stability: The company maintained high rental gross margins and indicated that recent price increases are still flowing through. Management suggested that further pricing opportunities exist as demand remains strong, particularly in specialty and transmission-related rentals.

Drivers of future performance

Custom Truck One Source’s outlook is shaped by persistent T&D infrastructure demand, ongoing fleet expansion, and order backlog strength.

• Sustained T&D demand: Management believes secular megatrends like grid modernization and increased transmission project activity will continue to drive equipment demand. CEO Ryan McMonagle stated that visibility into customer projects now extends into 2028, a shift from prior years when planning horizons were much shorter.
• Rental fleet investments: The decision to raise rental fleet investment is expected to yield higher revenues and adjusted EBITDA in 2027, as new equipment is deployed to long-term projects. CFO Christopher J. Eperjesy emphasized that these investments are “the highest return dollars” and should support deleveraging targets.
• Backlog and sales recovery: The backlog’s year-over-year growth and anticipated catch-up in delayed third-party sales are expected to support sequential revenue and earnings improvements in the next quarter. Management also noted ongoing cost control efforts to mitigate supplier price increases and regulatory cost pressures.

Catalysts in upcoming quarters

In the coming quarters, our analysts will be watching (1) the pace at which delayed third-party sales are recognized and their impact on revenue, (2) whether record rental utilization and backlog levels can be maintained amid ongoing project activity, and (3) the effectiveness of new fleet investments in boosting future EBITDA and supporting deleveraging. We will also monitor cost management and how the company navigates regulatory and supply chain headwinds.

Custom Truck One Source currently trades at $10.75, up from $9.01 just before the earnings. Is there an opportunity in the stock? Find out in our full research report (it’s free).

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