Heavy equipment distributor Custom Truck One Source (NYSE: CTOS) announced better-than-expected revenue in Q1 CY2026, with sales up 9.3% year on year to $461.6 million. The company’s full-year revenue guidance of $2.06 billion at the midpoint came in 1.5% above analysts’ estimates. Its non-GAAP profit of $0.02 per share was significantly above analysts’ consensus estimates.

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StockStory’s Take

Custom Truck One Source’s first quarter was marked by strong growth in its rental business, particularly in the transmission and distribution (T&D) end markets. Management attributed the positive results to higher equipment utilization, robust order activity, and continued productivity gains, especially in its Specialty Equipment Rentals segment. CEO Ryan McMonagle emphasized, “Our rental fleet averaged 81.4% utilization, up 370 basis points from last year, supported by robust levels of equipment on rent.” The company’s focus on operational execution and a younger, well-maintained fleet helped drive margin expansion, while ongoing customer demand for infrastructure and utility projects supported revenue growth.

Looking ahead, management expects the favorable market environment for T&D and utility equipment rentals to continue through the year, underpinned by secular trends in infrastructure investment and grid modernization. McMonagle noted that order activity and customer conversations suggest “these conditions will persist throughout 2026 and beyond.” CFO Christopher Eperjesy stressed that productivity improvements and disciplined cost management are expected to enhance margins. The company also plans to reduce maintenance capital expenditures and prioritize free cash flow, positioning itself for further deleveraging and strategic investments, even as it navigates macroeconomic uncertainty and regulatory changes like the EPA’s 2027 emission standards.

Key Insights from Management’s Remarks

Management credited the quarter’s outperformance to strong rental activity in T&D, improved fleet utilization, and cost discipline, while noting that continued order growth and margin expansion in both segments offset some softness in infrastructure end markets.

• Rental fleet utilization strength: The Specialty Equipment Rentals segment saw average utilization rise to 81.4%, helped by ongoing demand from T&D customers and effective fleet scaling. Management highlighted that both utilization and equipment on rent have trended even higher so far in the second quarter, indicating sustained momentum.

• Productivity and cost initiatives: The production team delivered significant cost reductions and process improvements, especially in the manufacturing segment. CFO Christopher Eperjesy noted these actions directly contributed to gross margin expansion and helped offset lingering pricing pressure in new equipment sales.

• Backlog and order activity: The Specialty Truck Equipment and Manufacturing segment’s sales order backlog grew 23% sequentially, with management pointing to “strong year-over-year net order growth of 13%,” particularly from local and regional customers. Despite softer demand in infrastructure-related equipment, utility and forestry categories remained robust.

• Pricing and yield management: Management implemented a 5% price increase in late 2025 for rentals, which is gradually cycling through the fleet. Higher-yielding transmission equipment rentals and disciplined pricing strategies contributed to improved on-rent yield and margin performance.

• Tariff and supply chain navigation: While recent changes to Section 232 tariffs created minor cost pressures, management believes current inventory levels and strong supplier relationships leave the company well positioned. CEO McMonagle stated, “We are in a good spot overall” regarding potential tariff impacts and supply chain bottlenecks.

Drivers of Future Performance

Custom Truck One Source’s outlook for the coming quarters is shaped by healthy T&D demand, ongoing fleet investments, and the company’s focus on productivity and capital discipline.

• Secular infrastructure demand: Management identified grid modernization, data center power needs, and utility investment as durable drivers of T&D rental demand, with customer conversations indicating a strong pipeline for both 2026 and beyond.

• Margin expansion focus: Continued cost management, productivity gains in manufacturing, and higher rental yields are expected to support operating margin improvements. Eperjesy indicated that reduced maintenance capital expenditures and working capital improvements should also boost free cash flow.

• Regulatory and supply risks: Management is closely monitoring regulatory changes, such as EPA 2027 emission standards, and supply chain dynamics. While inventory levels are currently elevated, the company expects to reduce them below six months by year-end, mitigating risk and supporting cash generation.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) whether strong rental utilization and order growth in T&D persist as infrastructure investments ramp up, (2) progress in reducing inventory levels and improving free cash flow, and (3) the company’s ability to maintain or expand margins through further productivity initiatives and pricing discipline. Additionally, we will track how the company adapts to evolving regulatory standards and supply chain developments.

Custom Truck One Source currently trades at $9.09, up from $8.78 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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