Executive Summary / Key Takeaways

• Custom Truck One Source (CTOS) is strategically positioned at the nexus of surging North American infrastructure demand, particularly within the electric utility transmission and distribution (T&D) sector, driven by unprecedented electricity demand from AI data centers and electrification.
• The company's integrated model of specialty equipment rental, sales, and aftermarket services, coupled with its industry-leading young rental fleet and specialized product innovation like the Outback Series, provides a significant competitive advantage.
• CTOS delivered strong Q3 2025 results, with 8% revenue growth and 20% adjusted EBITDA growth year-over-year, propelled by robust rental demand and new equipment sales, leading to a record total Original Equipment Cost (OEC) for its rental fleet.
• Management reaffirms its fiscal 2025 guidance, projecting total revenue between $1.97 billion and $2.06 billion and adjusted EBITDA between $370 million and $390 million, while accelerating rental fleet CapEx to capitalize on sustained market demand.
• A key focus remains on improving financial health, with net leverage sequentially improving to 4.53x in Q3 2025 and a clear target to achieve below 3x by the end of fiscal 2026 through levered free cash flow generation and inventory reduction.

A Foundation in Infrastructure: Custom Truck One Source's Strategic Imperative

Custom Truck One Source, Inc. (CTOS), founded in 1988 and headquartered in Kansas City, Missouri, has evolved into a critical provider of specialized equipment and services essential for North America's infrastructure. The company's core mission is to empower the construction and maintenance of vital assets, including electric utility transmission and distribution lines, telecommunications networks, rail systems, and waste management facilities. This foundational role positions CTOS at the forefront of significant secular growth trends, particularly the escalating demand for electricity driven by AI data center development and broader electrification initiatives. Industry projections estimate total T&D capital expenditure among U.S. investor-owned utilities to reach approximately $600 billion for the five-year period from 2025 to 2029, with annual growth rates nearing 10% and transmission spending potentially exceeding 15% annually through 2029.

CTOS operates through three integrated segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS). This comprehensive model, offering rentals, sales, and ongoing support for specialized equipment like bucket trucks, digger derricks, and cranes, forms a strategic moat. The company's multi-decade relationships with strategic suppliers and a long-tenured, diversified customer base further solidify its market position.

Technological Edge and Operational Differentiation

CTOS distinguishes itself through its commitment to specialized equipment and integrated production capabilities. The company's "Load King™" brand, for instance, represents a proprietary offering within its TES segment. A notable recent innovation is the "Outback Series," a new family of tracked easement machines unveiled at Utility Expo 2025. These machines are specifically designed for off-road and hard-to-reach environments, offering tangible benefits to customers operating in challenging terrains. This specialized design translates into enhanced operational efficiency and safety for utility and infrastructure projects in difficult access areas.

The strategic "so what" for investors is clear: such technological differentiators enable CTOS to serve niche, high-demand segments that require robust, purpose-built equipment. This capability fosters stronger customer loyalty and potentially higher margins by addressing specific, complex operational needs that generic equipment cannot meet. The integrated production capabilities within the TES segment allow for tailored solutions with shorter lead times, further enhancing customer value and competitive advantage. While specific quantitative performance metrics for these technologies are not publicly detailed, their strategic intent is to reinforce CTOS's competitive moat by providing superior, specialized solutions that drive demand for both its rental fleet and new equipment sales.

Competitive Landscape: Specialization Versus Scale

In the competitive landscape, CTOS operates alongside larger, more generalized equipment rental companies like United Rentals (URI) and Herc Holdings (HRI), as well as specialized service providers such as MYR Group (MYRG) and Quanta Services (PWR). CTOS's core competitive advantage lies in its deep specialization and integrated service model for critical infrastructure.

United Rentals, with its vast scale and broad offerings, often benefits from lower operating costs and wider market reach. However, CTOS's focus on customized solutions for utility and rail markets provides a qualitative edge in reliability and tailored support, fostering stronger customer loyalty in these niche segments. Herc Holdings emphasizes digital tools and operational agility; CTOS counters with its comprehensive rental, sales, and aftermarket services, aiming for long-term customer relationships. While CTOS's profitability in overlapping segments appears comparable to HRI's, its investment in specialized inventory might lead to qualitatively lower cash flow generation compared to HRI's technology-driven efficiency.

Against electrical construction and maintenance specialists like MYR Group and Quanta Services, CTOS offers greater flexibility through its equipment rental and sales, complementing their project-based expertise. CTOS's unique value proposition of end-to-end services helps it compete by addressing specific customer needs, though it may lag in revenue opportunities from emerging trends where MYR Group's positioning is stronger. CTOS's industry-leading young utility rental fleet, currently just under 3 years old, is a significant operational advantage, enabling it to offer reliable, high-performance equipment that can outperform older fleets in the market. This contrasts with competitors who may have older fleets, potentially leading to higher maintenance costs and less uptime for their customers.

Robust Performance and Strategic Capital Allocation

Custom Truck One Source demonstrated strong financial momentum in the third quarter of 2025, building on positive trends from earlier in the year. Total revenue for the three months ended September 30, 2025, increased by 7.8% year-over-year to $482.1 million, while adjusted EBITDA surged by 20% to $96 million. This performance was primarily driven by robust demand in the core T&D markets, leading to strong results across all segments.

The Equipment Rental Solutions (ERS) segment was a significant contributor, with total revenue increasing by 12.1% to $169.1 million for Q3 2025, and gross profit rising by 18.2% to $50.3 million. This growth was fueled by a 16.6% year-over-year increase in average OEC on rent, reaching over $1.26 billion, and a substantial improvement in fleet utilization to 79.3%, up 6.1 percentage points from Q3 2024. The on-rent yield remained strong at 38.2%, within management's expected range. The company's total OEC reached a record $1.62 billion at the end of Q3 2025, reflecting strategic investments to meet sustained demand.

The Truck and Equipment Sales (TES) segment also saw good performance, with equipment sales increasing by 6.0% to $275.4 million in Q3 2025. Despite some pricing pressures and mix shifts, TES gross margin remained within the expected 15% to 18% range. Management noted strong intra-quarter order flow, particularly from local and regional customers, with signed orders up over 30% year-over-year. The Aftermarket Parts and Services (APS) segment reported a 3.0% increase in total revenue to $37.5 million for Q3 2025, with gross profit up 22.9%, primarily driven by increased rental revenue from tools, kits, and accessories.

From a liquidity perspective, CTOS ended Q3 2025 with $13.1 million in cash and cash equivalents. Borrowing availability under its ABL Facility stood at $237.6 million, with an additional $232 million of suppressed availability, providing substantial liquidity. The company's net leverage improved sequentially to 4.53x in Q3 2025, down from 4.66x in Q2 2025 and 4.8x in Q1 2025. This improvement was supported by a $54 million reduction in inventory during Q3, contributing to lower floor plan balances.

Outlook and Strategic Trajectory

Custom Truck One Source is reaffirming its fiscal 2025 guidance, projecting total revenue in the range of $1.97 billion to $2.06 billion and adjusted EBITDA between $370 million and $390 million. This outlook is underpinned by the sustained strong demand in its core T&D markets and the anticipated benefits from accelerated depreciation provisions in recent federal tax legislation. Management expects ERS revenues to land in the upper half of its $660 million to $690 million range, while TES revenues are projected closer to the lower end of its $1.16 billion to $1.21 billion range. APS revenue is expected to be between $150 million and $160 million.

The company plans to accelerate its net rental CapEx to approximately $250 million for 2025, higher than previously expected, to capitalize on the robust demand environment and position for continued growth into 2026. Additionally, non-rental CapEx is increasing by $10 million to $15 million for production and manufacturing improvements at its Kansas City location, aimed at expanding capacity. While these investments will lead to levered free cash flow being less than the initial $50 million target for 2025, management is confident that the incremental CapEx will yield strong returns and higher sustained levels of free cash flow in the future. The overarching financial goal remains to reduce net leverage to below 3x by the end of fiscal 2026.

Risks and Considerations

Despite the positive outlook, investors should consider several risks. The company's significant variable-rate debt exposes it to interest rate risk, with a one-eighth percentage point change in applicable rates impacting annual interest expense by approximately $1.8 million. While CTOS does not currently hedge this exposure, its focus on debt reduction aims to mitigate this risk over time.

Economic uncertainty, continued high interest rates, and an inflationary pricing environment, partly influenced by tariffs, have led to some customer hesitancy in new equipment purchase decisions, particularly among smaller customers. CTOS has proactively managed tariff impacts through tactical inventory purchases and close supplier collaboration, but these macroeconomic factors could still influence demand and pricing. Furthermore, while current guidance assumes no prebuy related to evolving EPA and CARB emission standards, any future regulatory changes could introduce new dynamics. The company's ability to continue reducing inventory levels and effectively manage its working capital will be crucial for achieving its free cash flow and leverage targets.

Conclusion

Custom Truck One Source stands as a compelling investment opportunity, uniquely positioned to benefit from the profound and sustained demand for infrastructure development and maintenance across North America. The company's integrated business model, specialized equipment offerings, and strategic investments in its rental fleet and production capabilities provide a strong competitive foundation. With a robust Q3 2025 performance, reaffirmed 2025 guidance, and a clear roadmap for debt reduction and capital allocation, CTOS is actively capitalizing on megatrends like AI-driven electricity demand. While macroeconomic headwinds and interest rate sensitivities present ongoing considerations, CTOS's operational excellence, technological differentiation, and deep customer relationships underscore its potential for continued growth and value creation for discerning investors. The company's commitment to achieving a net leverage ratio below 3x by the end of fiscal 2026, supported by strategic CapEx and inventory management, highlights a disciplined approach to enhancing financial resilience and long-term shareholder value.