• We drilled into Synchrony Financial (SYF) in detail in an earlier commentary and we see SYF as a useful indicator of the broader consumer credit quality picture (see Synchrony: Credit Card Bellwether 10-30-25). SYF’s quarterly earnings reports include exceptional granularity in its disclosure, making it an attractive lender to monitor. While SYF is much smaller than a major bank such as Cap One as an entity, SYF’s 68 million customer accounts, $50 bn in purchase volume, and over $100 bn in loan receivables cut across a very wide array of retail channels and touches a products/services mix in its partners network that has impressive consumer breadth.

• After 1Q26 GDP posted abysmal growth in personal consumption expenditure (PCE) of 0.5%, the trend line has appeared to firm in the income and outlays releases (see Personal Income & Outlays May 2026: Bad Inflation, Balanced Spending 6-26-26, GDP 1Q26 Final: PCE Growth Plunge 6-25-26). The consumer sector will now face another test with oil spiking again and household anxiety at a possible inflection point if we see more challenges in household income, the job market, or inflation expectations.

• Anything that hits household cash flow can compromise asset quality, and the main events there are inflation broadly, higher health care premiums, and the consumer cash flow pressures from the oil spike. The downstream damage from oil is gasoline costs, a diesel spike that flows into surcharges and inflation (freight and logistics, ag sector, food costs, and later in year home heating bills for many). The soaring airline fares also factor into the story line into the peak summer travel season.

• The oil price and gasoline spike carries the ironic advantage of driving purchasing volumes higher at the pump. That still puts debt service pressure on customers and in some cases serves as a zero sum effect on customers in other categories. Of course, there is the more obvious risk of accounts simply engaging in more borrowing and saving less. The market has seen savings rates decline in the monthly PCE releases (income and outlays) data.

• The headlines around political turmoil and distrust – not to mention election threats –can also disturb consumer habits and cause government shutdowns. The “communist vs. fascist” thing and “savior of Christianity vs. corrupt pedophile” banter is not going to help many moods. Then again, the upper part of the “K” recovery will either keep spending or embrace retail therapy in a world that is going to hell. The problems are in the lower part of the K, so we will keep watching aggregate credit quality metrics from bellwethers such as SYF and volumes and quality coming out of auto finance.

The above chart updates the return performance of Synchrony (SYF) equity against Capital One, Ally, and the S&P 500. We also include the Equal Weight S&P 500 (RSP) to isolate the outsized tech weighting in the S&P 500. The obvious story is SYF wins. If we started the timeline at the end of 2019 ahead of COVID, SYF still wins. We thought the performance starting point from just ahead of the tightening cycle in March 2022 made for a useful frame of reference.

The above chart updates the major operating results line items. The +8% in purchase volume in 2Q26 came with +23% from co-branded cards. Loan receivables only grew by +2% to just over $102 bn while co-branded cards rose by +25%. Average active accounts were essentially flat at just over 68 million.

The strain of borrowing by households is not a new topic, and we cover the provisioning and net interest margins in the broader detailed commentary on SYF. We see an increase in the net interest margin to 15.08% in 2Q26 from 14.78% in 2Q25. The reality for the consumer and an important stabilizing factor for SYF is that a 21.6% yield on loan receivables buys a lot of cushion for market surprises with a provisioning policy that has been shown to be prudent.

The history of SYF goes back a long way from when it was GE’s private card business, and their history cuts across a lot of cycles. The recent years of COVID, an inflation spike, a tightening cycle, and two major oil spikes (post-Russia in 2022, post-Iran in 2026) put SYF to the test. They passed with honors.

The above chart updates the standard asset quality disclosure and moving parts of the allowance coverage and provisioning. The 90-day delinquencies are slightly improved into the low 2% range while charge-offs rate have also ticked lower to 5.43% in 2Q26 from 5.70% in 2Q25. FY 2025 posted 5.65% with 6.31% in 2024.

The allowance coverage ratio of 10.09% continues the low 10% handle balance seen since 2022. Prior to the 2022 decline, SYF saw 12.5% during the volatility of the pandemic period as they braced for impact. As it ended up, the year 2020 only saw 4.58% in charge-offs.

The above table updates the account spending volumes by platform category along with the related interest and fees on loans and the average loan receivables. All 5 platforms showed YoY growth in 2Q26 and in 1H26. Each quarter brings new partners and underscores SYF’s strategy has been working well for both customers and those goods and services companies in the partner ranks.

When you look at the high-level macro releases such as Personal Income and Outlays, we see savings rates declining to multi-year lows. That is consistent with spending firming up in spring 2026. With real wage growth recently hovering around negative or slightly positive, it is safe to say there is some incremental borrowing going on. We see it in the higher purchase volume detailed by platform above and in the total volume numbers seen above in the Operating Results chart.

The “purchase volume” part of the story reassures on consumer appetite to spend, so that is consistent with the old saying of “never bet against the US consumer.” Then again, asset quality trends across the full spectrum comprise a more complex set of issues in the “check-to-check” tier especially. The good news for Synchrony is its asset quality underwriting standards and risk management have held up well across some very unusual periods.

• We look at the comparative stock returns of the major public builders across a range of timelines. We leave out a few from our historical collection based on merger activity (Taylor Morrison, Tri Pointe) and takeovers in process (Dream Finder’s unsolicited bid for Beazer).

• Berkshire’s acquisition of Taylor Morrison Homes for $8.5 bn in enterprise value ($6.8 bn equity value) offers a reminder of the strong free cash flow profiles of the major builders that BRK tends to favor.

• The reporting season will shed some light on where builder selling prices are heading with monthly payments getting uglier and supply issues mixed by product tiers and regional markets. The price pressure has been downward from the builders reporting on ASPs, and those will be interesting to watch by region. The headline numbers in new Home Sales from the Census (due this week) come with the asterisks of region and price tier mix.

The table details the running timeline equity returns on a range of homebuilders. We also include some useful benchmark comps including the Homebuilder ETF (XHB), which includes suppliers.

We line the builders up in descending order of returns for the trailing 1-year period. Toll Brothers leading the pack is no surprise since their customer base is not sweating out mortgage approval or monthly payment pressures (see Toll Brothers Update: The Million Dollar Club Rolls On 8-26-25, Credit Snapshot: Toll Brothers 5-5-25, Toll Brothers: Rich Get Richer 12-12-24).

The regional builders look good (notably M/I) since that tier comes with a growth twist. Pulte Group offers some of the highest margins in the industry, so we will be interested in their numbers when they report this week given the pressure on selling prices and supply costs we hear about in the space (see Credit Snapshot: PulteGroup (PHM) 5-7-25).

On the other end of the spectrum in selling prices, D.R. Horton remains one of the best bellwethers to look at for multiple reasons even beyond its national scale as the largest builder and highest market cap (by far). DHI posts prices that are more in line with “normal people.” DHI is also in the build-to-rent business and is a majority-owner of a land/lot developer, Forestar, which has done well. The struggles of Lennar and NVR in performance over the past year are worth digging into against peers when all the reports are in.

Deals will continue…

The Taylor Morrison deal was a major headline as a top builder will get taken out of the public domain. We liked the company and the consolidation theme continues with more deals likely to unfold (see Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25, Credit Crib Note: Taylor Morrison Home Corp (TMHC) 5-20-24). The TMHC operating strategy had been a success story with BRK retaining the management team.

We have seen major Japanese suppliers/builders making deals to integrate downstream into the US (Tri Pointe by Sumitomo. M.D.C. by Sekisui) and over the years plenty of intra-US builder acquisitions to broaden product tiers and geographic mix. Taylor Morrison made some transformational deals itself (e.g. William Lyon) on the way to Berkshire buying them.

“Taylor Morrison Home Corporation (NYSE: TMHC) and Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) jointly announced today that they have reached a definitive agreement for Berkshire Hathaway to acquire Taylor Morrison for $72.50 per common share in cash, representing a total equity value for Taylor Morrison of approximately $6.8 billion and total enterprise value of approximately $8.5 billion. The acquisition price represents a 24% premium to Taylor Morrison’s latest closing price of $58.50 on May 29, 2026.”

The Beazer hostile takeover can be seen as another stage of the industry consolidation story that has played out across the past housing cycles. BZH is still working its way through the process:

“In connection with this work, on June 29, 2026, Beazer informed Dream Finders that it believed Dream Finders’ June 22, 2026, updated proposal to acquire the Company for $29.25 per share continued to significantly undervalue the Company and did not represent an appropriate basis for further discussion. In reaching this decision, Beazer’s Board was informed, in part, by the potential shareholder value represented by other proposals and Beazer’s current standalone strategy.”

“On June 30, 2026, Dream Finders raised the value of its proposal to $32.00 per share and relinquished its exclusivity requirement, but it refused to enter into a customary confidentiality and “standstill” agreement similar to those entered into by other parties. Instead, Dream Finders decided to make its latest proposal public in what can only be perceived as an attempt to pressure Beazer’s Board to engage with Dream Finders under unilateral terms that Beazer’s Board does not believe to be in the best interests of shareholders.”

There is a clear divergence in the builder equity performance, but the exceptional cash flow resiliency of the larger players mitigates credit risks.

• We detail the trailing shareholder timeline returns for the legacy Detroit 3 (asterisk on Stellantis) vs. the Japan 3.

• Ford and GM post better numbers in comparative returns to the peer group over the past year with the US market somewhat of a ground zero for evaluating supplier chain and material cost risks in the new trade environment.

• The pressure on consumers has not weighed very heavily on the new vehicle buyers in 2026, but the bias of forecasts is for moderate downside in light vehicle sales for the full year subject to what could go wrong if Iran and trade war risk go the wrong way.

The chart details the running timeline equity returns for the bellwether high volume OEMs in the legacy Detroit 3 (Stellantis has an asterisk on that label) framed against the Japan 3 (Toyota, Honda, Nissan). We present a range of timelines and line them up in descending order of total returns for the trailing 1-year period.

With GM reporting on July 21, Ford teed up for July 28, and Stellantis for July 30, the market will get a chance to hear how the Iran fallout, tariffs, and higher consumer financing costs are playing out. Visteon also reports (July 23), but the major Tier 1 and Tier 2 suppliers generally report in following weeks. The color on how the materials and tariff effects are playing out will be important input. White House trade reps can do their spin, but double entry accounting is alive and well. Someone pays the costs in whole or in part along the chain.

The peak spring selling season is under our belts, and the expectations with gasoline price spikes hitting household discretionary cash flow will see some cause-and-effect details even if it is simple logic such as higher demand for hybrids. The yield curve does not promise cheaper retail financing or lower monthly payments on higher price vehicles. The supplier-to-OEM chain is facing mounting costs from tariffs and more expensive tech components (DRAM, etc.) in competition with the AI ecosystem.

Last week, we looked at Ford to tee up the recent history in model volume performance and Ford Motor Credit metrics (see Company Profile: Ford Motor and Ford Motor Credit 7-17-26). We had earlier done a similar exercise for GM (see Credit Profile: General Motors and GM Financial 10-9-25). Both Ford and GM are in very good shape.

Ford and GM have demonstrated operational resilience and strategic dexterity to adjust to a radical shift in trade and propulsion strategies created by the Washington whipsaw. The shift from the “War on ICE” (the other ICE) to the “War on EVs” was very costly and the political risk factors and erratic trade policy still lurk on the chalkboard (USMCA “review” and possible trade war or termination).

Long term strategy and intermediate tooling commitments and supplier contracts are hard to manage when the left vs. right whims tend to dominate the policy planning rhetoric. After all, these auto manufacturers make cars for Democrats and Republicans as well as for extremists on both sides of the political spectrum. They also employ a lot of both.

• With GM (7/21) and Ford (7/28) set to report earnings and offer updated guidance, we update the Ford and Ford Motor Credit chart collection and await the peak season news. Guidance from such consumer bellwethers will offer some visibility as to how the curve and Iran have influenced expectations on volumes and consumer preferences. The average new vehicle buyer is arguably above the “K” midsection with the average used car buyer below it.

• Ford has been able to sustain stable credit quality across a wild period that included a pandemic, a very brief recession (2 months), an inflation spike, a rapid tightening cycle, then back into an easing cycle, and now a potential return to tightening. Ford also faced a whipsaw of regulatory aggression that first attacked traditional ICE propulsion under Biden before an equally aggressive attack on EVs under Trump. The Russia-Ukraine experience of 2022 seems forgotten as a major factor in the CPI spike (too busy blaming Biden for everything) and the latest Iran situation is at a crossroads that can mean a return to semi-normalcy or severe escalation (civilian infrastructure attacks, Houthis shuts down Red Sea, etc.).

• Capex excess on EV expansion in the end generated waves of multibillion dollar write-offs as investments proved uneconomic with EV consumers much smaller in scale than expected, and the EV sector broadly undermined by policy actions. That made for tough headlines, but billions in impairments and related charges now fall into the “that was then, this is now” bucket.

• Ford’s ability to adapt and adjust to most any cyclical backdrop and competitive conditions have been demonstrated with the ultimate (but largely forgotten) ability of Ford to be the sole member of the legacy Detroit 3 to avoid Chapter 11 back in 2009.

• We vote more with the stock market’s assessment of Ford’s prospects than the muted and mixed credit rating agency view on Ford’s performance and risk profile. We see Ford financial metrics as stable and clearly investment grade caliber in contrast with the mixed “cusp” credit ratings. EBIT trends and free cash flow guidance are constructive even if targets could be slow to be met given the uncertain macro backdrop and Iran fallout.

• Ford faces less daunting tariff threats than GM in terms of its geographic mix of production with Ford the #1 manufacturer of light vehicles in the US. In contrast, GM has a heavy exposure to Mexico that is slowly being addressed under the Trump tariff regime. Uncertainty around the pending USMCA review will generate discussions on supplier chain costs and domestic content aspects that come out of any final move by Team Trump on trade. GM shows a clear edge right now in its ICE product cycles with Ford closing the gap while Stellantis and some other major US operators (notably Nissan) have been struggling badly.

The above chart plots the total returns over the trailing 1 year for Ford, GM, and Stellantis (STLA) against the S&P 500. STLA is in its own zone of pain and is a story for another day. The running returns for STLA remain grim across a range of timelines. GM is in the best shape in its risk profile even with its outsized Mexico exposure. The company is very well set even in EVs but its core strengths were in ICE SUVs and trucks (see Credit Profile: General Motors and GM Financial 10-9-25). Ford spent the past year playing catchup with GM as it navigated the EV shock and radical shift in policy and how Ford and GM would both adjust to the higher tariffs that also fell hard on the import competition.

The headlines around Ford in 2025-2026 have been more about the scale of the setbacks from a failed EV push that was undermined by dramatic policy changes. That naturally generated “special items” and restructuring charges associated with the Electric Vehicle (“EV”) ambitions. Those EV related charges comprised the bulk of the $17.4 bn in FY 2025 and $15.5 bn 4Q25. EV cost pressures include some cost recovery for the suppliers that committed capex to tech and product lines.

Despite a difficult rear-view mirror wrapped around EV losses that will never be recouped, the post-1Q26 boost in guidance and projections for FY 2026 show sustained profitability in the two core, profitable segments (Blue and Pro) and cash flow that keeps Ford quite stable in credit quality even with higher capex. Free cash flow is a positive factor in the Ford story. There is cyclical room to maneuver.

Some big swings in OEM equities…

Ford’s equity performance was chasing a superior performance by GM, who has outperformed autos as well as the broader markets. On a YTD basis, Ford equity is now ahead of GM, but GM is well ahead for the trailing 1 year, 3 years, and 5 years. The good news is Ford and GM are outperforming the “Japan 3” (Toyota, Honda, Nissan) and Kia/Hyundai over 1Y and 3Y.

The headwinds from the EV whiplash across the Biden-to-Trump transition were brutal as one went from the “War on ICE” to the “War on EVs.” In addition, Trump tariffs slapped an incremental $2 bn in expenses on Ford above the $2 bn headwinds from the Novelis fire in Oct 2025 and related disruptions along the supplier chain.

Ford nonetheless has pushed through those setbacks and has been guiding to materially higher profits and higher margins in 2026 to go along with higher capex. The Adjusted EBIT range for 2025 was bumped up by $500 mn to a range of $8.5 bn to $10.5 bn. Adjusted free cash flow for FY 2026 of $5 bn to $6 bn stayed unchanged at 1Q26 from where it was during 4Q25 earnings.

The cyclical volume variable…

Industry volumes have held in well with a small industry decline in 1H26 car and light truck sales of -2.7%. Ford has lost some share in the process with 1H26 sales down by -9.6%. We cover the Ford sales deltas in charts further below. Ford SUVs were down -12.1% with trucks off by -9.0%. The F-150 was still the top selling model but with GM still the top seller of pickups when you combine the brands. For the overall industry, 1H25 was the best in 6 years, so the 1H26 comps are tough.

Volumes are not always the main story across quarters, and the goal is not maximizing share and volumes but instead prioritizing profits. Ford has faced some pressure on volumes such as the F-150 with constraints on aluminum supply. As the trade publications emphasize, the goal of maximum profitability can be achieved with less volume. It is about optimizing mix and option packages across the lineups. The quality of the Ford model and product segment mix is in a very good position at this point.

The above chart uses a timeline starting at the end of 2019. We see the S&P 500 winning on the tech boom but GM and Ford both turning in very solid performance over the period. Stellantis is once again in the tank.

The market volatility underscored some companies (including Ford) were viewed as the way to play the EV priorities being pushed by Team Biden and Congress (remember the days when legislation was used and the balance of powers were more than a distant memory?). That was also a period before tariffs started to nuke low-cost global supplier chains built over decades.

If we use a starting point on the legacy Detroit 3 “auto comps” from the pre-COVID period as in the chart above, we get a look at how Ford vs. GM framed up across an array of mini “cycles within cycles.” The 2020 to 2026 timeline included a pandemic, ZIRP, the Capitol being sacked, a de facto declaration of war on the internal combustion engine (ICE) by Biden, an inflation spike in 2022 to the highest since Carter/Reagan, a Fed tightening cycle from March 2022, then a brief easing cycle starting in late 2024, and then a declaration of war on electric vehicles by Trump in 2025-2026.

Along the way, the world faced two oil shocks with the late Feb 2022 invasion of Ukraine by Russia and the joint US-Israeli attacks in Iran in 2026. That last one is still unfolding in somewhat erratic fashion. The propulsion mix and relative risk and economics are still shifting with hybrids seeing rising demand.

The Mideast war was a memory lane moment, and I could not help but think back to Chrysler bonds at 50 cents on the dollar as Desert Storm approached in 1990 and Chrysler getting bailed out during the Carter years with the Iranian oil crisis (1979). Both brought recessions.

Tariffs, supplier chain, and structural change…

We now have the additional wildcard of tariffs and global supplier chain stress along with the potential termination of the NAFTA/USMCA agreement. The past quarter century was about the overhaul of the legacy Detroit global footprint, radical capacity downsizing both before and after the 2009 bankruptcies, and the explosive growth of the US transplants (Japan, Korea, Germany).

More recently, the multi-decade and multicycle evolution of low-cost global supplier chains is now being shredded by tariffs and protectionism. Mideast war with oil prices still facing a potentially wide trading range is an X factor in a period of high inflation in post-1990 context.

The main point is the post-restructured Ford and GM have clearly demonstrated an operational flexibility that allows them to react to setbacks that would have blown them up before 2009. The structural changes that unfolded in industry evolution since earlier cycles make for lower levels of business risk. GM and Ford are now essentially North American and US-centric auto OEMs after global ambitions were dialed back by reality that led to GM’s post-Chapter 11 and the Section 363 “new GM.”

The Chapter 11 history and acquisition of Chrysler by Fiat is another convoluted story on the way to the creation of Stellantis. The grim Stellantis performance in the equity markets is evident in the chart. The legacy Chrysler piece of that operation is a separate topic. STLA carries its own tragic history as the company struggles badly yet again.

The above table offers a top-down financial view of the timeline from the bull market ZIRP year of 2021 through FY 2025 and then the 1Q26 vs. 1Q25 period. The low financing costs were running alongside post-COVID pent-up demand that saw used vehicles cleared off the lots with used vehicle inflation spiking to north of 40% in early 2022 (see Automotive Inflation: More than Meets the Eye 10-17-22). Even away from a mass pandemic, that was a very unusual time in the auto sector.

As noted above, the transition from the “war on ICE” to the “war on EVs” has generated billions in costs even if the majority of the costs are noncash impairments. The $11.8 billion loss in 2025 includes $17.4 billion in special items with $15.9 billion tied directly to auto restructuring. That included $10.7 bn in Model e asset impairments and $3.2 bn associated with the disposition of the BOSK JV (battery venture with SK ON). Another $1.2 bn was tied to the cancellation of the 3-row SUV electrification. The EV vs. ICE policy whipsaw has been very costly.

No shortage of risk factors that are tough to quantify…

In today’s world, the biggest manufacturing cost threats are tariffs and materials cost pressure (notably petrochemicals, aluminum and copper). The latest wave of upward price pressure on semiconductors is a unit cost challenge as autos compete with AI and data center demand. Supply is tight, delivery schedules crowded, and chip prices soaring (DRAM) with the rapid advances in auto tech and software. The “labor arb” decisions to focus on Mexico suppliers could also see more pressure at the same time Canada is the low-cost aluminum producer of choice facing tariffs. The USMCA is a material risk factor as dictated by the White House. Congress does not play a role.

The consumer household cash flow pressures also weigh on fundamentals. Weak to negative real wages matter and influence the “new vs. used” decision. Household pain is tied to broad CPI increases and higher funding costs along with materially rising healthcare costs for services and health insurance - despite what the CPI lines say on the latter (see CPI June 2026: Eye of the Storm? 7-14-26).

The undermining of lean manufacturing…

There is no need to repeat the list of the wild times, but we would rate the protectionist tariffs and disruption of global supplier chains at the top of the challenge list from materials across the Tier 1, 2, and 3 component suppliers. The defining discipline of “lean manufacturing” sprung from many global OEMs trying to see what they could learn from the Toyota Production System (“TPS”) in the early 1990s since the #1 Japanese OEM was eating everyone’s lunch. An OEM-sponsored MIT study produced a very readable book “The Machine That Changed the World” that broke out “how it’s done.”

We can summarize the problem now as those systems and approaches – which can take decades to get right – are now getting slammed by Trump’s trade policies and erratic tariff strategies. If you read the auto trade publications, you get a sense of the disarray and panic in many pockets of the auto sector from suppliers to OEMs.

Management teams do not preach out loud about the common-sense damage from tariffs out of fear of retribution and the ongoing need to lobby to mitigate damage. The least resistance strategy is to “wait out” Trump and see if the “next guy” can admit that the buyer pays the tariffs – not the seller. Trump missed that fact early and often and will never reverse himself.

USMCA and EU trade tension…

The USMCA nonrenewal will be the biggest wildcard ahead in 2026 for the auto sector, and the good news for Ford is that they are the least exposed as the #1 producer in the US with much lower exposure to Mexico than GM. EU and Japanese transplants and import tariff impacts are another source of cost pressures that need to be eaten by OEMs or flowed through.

The tariff cost threats typically get quantified by GM and Ford on earnings calls, but the fallout along the supplier chain is a major worry as they seek cost recovery from their large customers.

Loan rates squeeze affordability…

The broader topic of inflation and higher rates hit the consumer in retail financing costs that do not show up in the auto CPI and average transaction payments CPI line. That is the same for home price inflation where monthly payment pressure rules.

The “average marketed price” for sales at dealership hit $51,794 at the end of June (per Automotive News). The average monthly payment on a new vehicle is now over $770. If we look at the median payment for all new auto loans from 2020 ($580), the nominal payment is now 34% higher. In many areas of the US, that new vehicle monthly payment is a rent check. The loan terms have been extending more frequently to 84 months with recent data for 1Q26 showing originated loans at over 1/3 of loans beyond 72 months in the interest of making monthly payments more affordable.

The 3 major business reporting segments were revamped back in 2023 with the main theme being the vehicle propulsion and/or the customer segment (notably retail vs. commercial and fleet). The commercial and fleet customers sales roll up under the Pro segment, so it is not solely the vehicle types. The emerging and growing Ford Energy business is in the Ford Pro segment given its commercial customer focus. Ford Energy is not in the Model e segment. The expectation on Energy is for favorable growth and higher multiples assigned to those assets. That will start to get more visibility in coming quarters.

The divergent profitability of the segments certainly made the segregation of the loss-generating EVs a good reporting discipline to isolate the Blue and Pro mix from those ugly numbers in EVs. The reporting allows investors to track and isolate how much progress Ford can make in narrowing the massive losses in the EV-related business after all the billions in special item charges and shifting strategy in electrification.

The Ford Blue segment includes the ICE and hybrid vehicles sold to retail customers and includes retail sales of F-150s even if the brief life of the F-150 Lightning sales rolled up in Model e.

For Ford Motor Credit (FMC), the earnings power and asset quality is reassuring that the unit will continue to be a major source of earnings power and a source of dividend cash flow for the parent company.

Guidance by segment…

Ford offers FY2026 segment EBIT guidance in its 1Q2610-Q:

• Ford Pro EBIT of $6.5 bn to $7.5 bn.

• Ford Blue EBIT of $4.5 bn to $5.0 bn.

• Ford Model e EBIT with a loss of $4.0 bn to $4.5 bn.

• Ford Credit EBT of around $2.5 bn.

This guidance is within a consolidated adjusted EBIT guidance of $8.5 bn to $10.5 bn. The EV and related business lines have been a major use of funds and capex, and the policy differences across two administrations inflamed the scale of the capex boom in the case of Biden and decimated the earnings potential of that capex under Trump. The old adage of “let the consumer decide” goes back decades to “big car vs. small car” and “gas guzzling SUVs vs. high mpg economy cars.” This latest policy whipsaw was likely the most costly in history. That responsibility is shared by excess under Biden matched up with excess under Trump.

The theory now is that the industry will go through a period of stability in such policies at least through 2028 and that some lessons have been learned on how a war on propulsion categories brings a great cost and a lot of political risk. The OEMs should at least have a period of calm and less of that battle as they get back to “what they can profitably sell” with hybrids seeing high demand but EVs still a part of longer-term planning. Ford is well positioned to prosper with that backdrop as is GM.

Model strategies are for other days, but the propulsion debates likely will take a back seat to more nuanced model plans that also take into account the tariff and supplier chain costs as well as consumer demand.

The above table breaks out the detail on Ford and Lincoln product segments across the timeline and also the mix shift by propulsion types. We also see the pattern of EV volumes since 2022. We picked 2022 to start the timeline since it was a tightening year that undermined affordability via financing costs. The financing costs do not get captured in vehicle CPI (new or used). The total sales volume rose each year into 2025 with 2026 now showing some declines for 1H26 vs. 1H25.

The 2022 period was a year when EVs were ramping up to a 2025 peak. The declines in EVs stand out in the 2Q26 and 1Q26 periods. As we cover elsewhere in the report, the massive EV capex and product line investment led to the charge-offs of 2025 after the EV policies were whipsawed by the policy reversals with the change of administrations.

We also see some fade in Ford’s hybrid totals, but the industry trade rags have made it clear that demand for hybrids has gained a lift from the Iran turmoil. The now-cancelled Ford Escape (2026 final year) has a high mix of hybrids so that was a major factor. Ford has placed a priority on more hybrid offerings across its product lines and a much more measured and tactical game plan for EVs.

Ford cited the phaseout of its legacy high volume Ford Escape and also cited a 69% decline in daily rental sales volumes.

A world where few vehicles are called “cars” has been a trend over the decades with Ford a dramatic case in point with the low volume Mustang. GM uses different labels. The SUV/CUV mix runs the gamut, but the trend overall has seen declines in volume. Total SUVs were down -15.5% in 2Q26 and by -12.1% in 1H26. The larger truck-like Bronco is higher while the smaller (more car like) Bronco Sport is down slightly.

The iconic Explorer posted a +13.8% 2Q26 YoY and +21.0% for 1H26. The large Expedition has struggled, down -27% in 2Q26 and by -9.8% in 1H26.

Ford’s truck franchise is led by the F-150 full size pickup, which is regularly flagged as the #1 selling pickup (in fairness to GM, the Chevy Sierra and GMC Silverado are the #1 pickup offerings in total but across 2 brands). There is the reality of the sales declines and market share erosion in 2026 for the F-150 with 2Q26 at -11.0% and 1H26 at -13.3%. Bronco set 1H26 and 2Q26 records.

The Ford Maverick compact pickup has been a success with its shared platform with the Bronco Sport and has bragging rights as the #1 best-selling hybrid pickup. Maverick posted modest volume declines in 1H26 at -5.0% and 2Q26 at -0.4%. As a unibody platform, it is more carlike (CUV like) than the midsize Ranger pickup. The Transit van has been a very solid and steady performer also as evident in the time series.

The cash flow history of Ford since COVID is reassuring when you consider what unfolded during that time. With capex teed up for an increase to $9.5 to $10.5 billion in 2026, Ford will not be defensive in pursuing its longer term targets including a low cost, profitable EV geared to the right scale to meet customer demand.

The table also offers a reminder of how Ford Motor Credit is a highly profitable stand-alone profit center that supports its independent dealer network. At the same time, FMC has been a major source of dividend cash flow to the parent company. The material increase in dividends in 2021 capture the reality of cash flow generation when volume trends lower and receivables get liquidated, in turn generating balance sheet downsizing to upstream to the parent. The 2020-2021 period saw $10.8 bn in total dividends to the parent including $7.5 bn in 2021.

The above table updates the balance sheet for Ford (ex-FMC) in the period from 2019 through 1Q26. We see the peak borrowings during COVID in 2020 over $24 bn ahead of the reduction in debt to under $20 bn in 2022 and under $20 bn at 1Q26. Long term debt is at the lowest since 2019. Cash and marketable securities at 1Q26 for Ford ex-FMC totaled just under $22 bn, so the balance sheet is strong and liquidity heavy and all set against a Ford equity market cap of over $56 bn.

The Ford Motor Credit asset base is detailed in the above table. The asset totals and mix highlight where the earning asset base had trended in size and mix. For FMC, revenue is dictated by the average earning asset base, interest income generated by those assets and how that frames up vs. the interest expense cost to fund the balance sheet. The level and shape of the yield curve help set the net interest margin. Swings in asset quality and prudent provisioning on the expense line determine where the income will be reinvested or upstreamed as dividends.

We see total finance receivables down from the FY 2024 peak with retail contracts barely lower and dealer financing receivables modestly lower. Allowance for credit losses ticked higher sequentially in 1Q26 from year end on higher provisioning as covered in a separate table herein.

The above table plots the debt layers of the FMC capital structure across the unsecured debt and asset backed layers. The balance sheet strategy includes a diversified funding base and a target financial leverage ratio of 9:1 to 10:1. The liquidity and quality of the asset base make such leverage metrics easily manageable. The ratio at 1Q26 was 9.5:1, which was flat YoY.

The captive finance units of Ford and GM are a core part of a highly integrated chain that includes the independent dealer network. That ability to adjust the balance sheet to the needs of the end market has been demonstrated across the cycles. FMC is a low risk credit exposure with the ratings tied to the parent auto operations. The exceptional financial flexibility of FMC is rooted in the liquidity of its receivables, the ability to fund in the ABS markets, and the quality of the asset base.

The Ford dealer network can fund their customer sales with other banks or with Ford Motor Credit (FMC). The riskier loans to fund weaker borrowers and higher risk used vehicles are often handled elsewhere with nonprime and subprime consumer lenders who focus on the riskier customer or older used cars.

There is plenty of disclosure on asset quality and counterparty risk that details the risks across the credit tiers and plenty of metrics to monitor.

The above table details the asset quality trends on a worldwide level. We see the charge-off numbers, the credit loss reserve cushion, and loss-to-receivables (“LTR”) trends. We see the LTR eroding while the reserve ratio has been steady since 2023 but below 2021 and 2020. The LTR will be one to watch if charge-offs tick higher, which we expect they will.

The loss reserve has risen as higher charge-offs generated a higher provisioning need with higher interest rates increasing the burden on consumers in the current market. The 1Q26 provision of $172 million is materially higher than the $140 million in 1Q25 just as FY 2025’s provision of $528 million is much higher than $417 million in FY 2024 and only $278 million in 2023.

The table above details the US retail credit metrics. We see the LTR metrics weakening at 0.72% and delinquencies higher from year end at 0.21%. The repossession rate is also rising to 1.40% along with the loss severity to 17.5%. FICO scores remain high and higher risk portfolio exposure minimal at 3%. A FICO of 748 is prime but the lowest since 2022.

The exposure to longer maturity retail loans of >84 months has been rising steadily through 2025 to 14% as we have seen across the industry but ticked down to 12% in 1Q26. That trend has allowed monthly payments to move lower to “get the vehicle sale printed” but also creates intermediate term risks of higher losses on repossession and increases exposure to negative equity risk as residual values decline.

The above table does a similar exercise to what we did with General Motors (see Credit Profile: General Motors and GM Financial10-9-25). We look at Pension and OPEB (health care) retirement obligations and the trend line across a very volatile period for the underlying FASB assumptions (notably discount rates) and how they flow into the financial risk profiles of Ford. The GAAP accounting vs. ERISA accounting is always a big caveat, but you work with the data they give you that comes out once a year with some occasional interim adjustments.

We have written a lot on the pension topic over the years in following the auto sector, and the short form version goes something like this:

• Debt like vs. contract risk: Pension liabilities have statutory clout and funding requirements, so the pension line is more “debt like” while OPEB is more about “contract risk” than debt. One can argue the point on how these obligations are treated for accounting purposes, and the economic substance of FASB requirements is an old topic. For credit risk assessment, the more important lines to watch are funding requirements as detailed in the financials and footnotes and unfunded defined benefits as a proxy for debt-like exposure. OPEB is typically a “pay as you go” expense to watch.

• Funding plans consider “minimum” vs. discretionary”: The funding activities of the Ford plan are routinely disclosed and vary materially from the periodic GAAP expense recognized. The above chart details the net funded or unfunded exposure across a very active period of assumption variation from 2019 and then across COVID, ZIRP and a tightening cycle. For pensions, Ford contributed $720 million in 2025 to funded plans and expected to make $550 mn in 2026. Global OPEB benefit payments were $331 mn in 2025 and $324 mn in 2024.

• GAAP treatment vs. ERISA measurement: There is an important distinction between GAAP and ERISA accounting rules in funding requirements and statutory risk exposure. Legislative relief on discount rates had been routinely provided and updated after the credit crisis to mitigate the damage of materially lower discount rates that come with the UST curve impacts that would have stressed corporate sector liquidity.

• Discount rates as a major driver of book liabilities: The underlying assumptions can really whip around the projected benefit obligation as we see in this very unusual stretch of yield curve migration from 2019, across the pandemic and ZIRP period, and then on into the tightening cycle as ZIRP ended in March 2022 with rapid tightening before the start of the easing cycle again in Sept 2024. The derisking strategy of Ford’s pension asset allocation includes a dominant share of fixed income to mitigate the effects of moves in interest rates. At 12-31-25, Ford’s US pension held almost $25 billion in fixed income (excludes equities and NAV assets) out of $30 bn in assets supporting the US plans.

• Pension-adjusted balance sheets: The use of pension adjusted leverage metrics get some limited focus in the case of mature industries with massive defined benefit pension plans (automotive, legacy airlines, utilities, defense and aerospace). Pension-adjusted leverage or adjusted Enterprise Value metrics (Pension Adjusted EV/EBITDAP multiples or the seldom used pension and OPEB adjusted EV/EBITDAPO, etc.) get some lip service, but few hang their hats on such valuation. They can use it for comps with suppliers. Even then, you can get a debate on whether to use tax-adjusted unfunded liabilities (you need to pay your pension whether you are a taxpayer or not).

• Statuary funding requirements vs. discretionary is the main event: Funding pensions is an expense and a use of cash even if the funding event for ERISA can differ materially from the GAAP pension expense. It is worth monitoring in the case of DB-pension-heavy issuers since the use of cash is an important variable in considering debt levels, share buybacks and dividend paying power. As the years go by, DB pension plans get closed or frozen, and the actuarial tables take their course (Grim Reaper, etc.), when the pension risks diminish. OPEB becomes more a recurring cost of business with many companies taking the approach of “when you hit 65, Medicare is your destination” (Get off my lawn!) That is especially the case with salaried employees vs. hourly, unionized workers.

• “Closed” or “frozen” matters: With collective bargaining agreements, the terms of the pension and OPEB plans overlap with health care benefit terms for current employees. That makes it a sensitive subject for current retirees and current employees alike. Those UAW contract topics across history are not for this commentary. That battle between employers and union employees on legacy defined benefit plans (“DB” plans) vs. defined contribution (“DC” plans) have been playing out across the cycles. “Closed plans” do not take new members (“DC plans only” for new employees. UAW plans such as those at Ford are closed to new entrants with new hires in defined contribution.

• After our earlier look at the performance of retail equities last week with a wave of earnings reports, we update a broad group of retailer equity returns for the past week (see Retail Equity Comps: Looking for Signals 5-26-26).

• The Hi-Lo range of around 36% (30% if we toss out the Hi and Lo data points) and a positive-negative score of 13-19 tell a very mixed story. The two bellwether retailer ETFs (XRT, RTH) split the difference for the 1-week period with a +1% handle return for XRT (very well diversified) and -1% handle return for RTH (heavy weighting of Amazon and Walmart).

• We excerpt some quotes from the management calls that signal the impact of tariffs or summarize their view on the consumer. It is just a flavor sampler.

We discussed the two major Retail ETFs plotted above in a brief retail commentary last week. This update above uses price returns and starts just before the Iran adventure (aka “war”) kicked into gear. RTH is very exposed to Amazon (AMZN) and Walmart (WMT) at around a 35% weighting while the XRT is exceptionally diverse with the largest holding well under 2%.

The negative trend is evident in both. Retail equities are mostly in negative return range since Iran. That is not a surprise given the cost fallout. The chart below for weekly total returns from this past week can be read in conjunction with the earlier note that includes that week as well as a YTD cut of the data. The takeaway is one of winners and losers (as is usually the case in retail peer groups) but also a theme of resilient consumers that are shifting gears on affordability challenges but not in sales contraction mode.

The lower economic tier consumers and value seekers are not a new theme by any stretch, but the news of late has been about strain in credit card debt service starting to appear. Those are more important than soft sentiment indicators. The recent PCE release also flagged a plunge in savings rates to the lowest since 2Q22 at the inflation peak. That is not good news in this case if the pressure on household costs increases from here (see PCE Inflation: Income and Outlays April 2026 5-28-26).

The above chart follows up on what we posted after the first big round of retail earnings. Two weeks ago, earnings releases included bellwether Walmart along with a range of other key players such as BJ’s, Home Depot, Lowe’s, TJX, Ross Stores, Target, and Urban Outfitters among others (see Retail Equity Comps: Looking for Signals 5-26-26).

This past week brought a fresh batch of earnings that provided a mixed but balanced picture with some clear winners and losers. Among the stellar performances on the week as posted above was Best Buy (BBY) and Dollar Tree (DLTR) along with the much smaller cap Kohl’s (KSS) who beat on their numbers and rallied by almost 10% on the week. That doesn’t change the fact that KSS is running at almost -29% YTD.

The profile of returns above shows a lot of negative numbers on the week with The GAP on the bottom. The 13-19 score in the mix shows the Equal Weight S&P 500 ETF (RSP) on the bottom of the positive asset lines at +1.1%. The weighting toward negative returns is suboptimal for retail but not anything resembling a panic button. We ran through a range of press releases and transcript excerpts and looked for brief statements on a few high-level topics to find some cut-and-paste material:

· How do they see their customer base narrowly or the consumer broadly?

· What is happening with tariffs? (they are always very cautious on that political hot button).

We use some from the past week and some from the prior week. We found The GAP disclosure among the more extensive on the topics.

Notable tariff and cost commentary from retailers…

We spot checked for tariff color in terms of margin impact and how some retailers see the world in the post-IEEPA period after the SCOTUS decision and how they are gauging what comes next with Team Trump scrambling to replace the IEEPA tariff revenue.

The apparel companies were especially exposed to the tariffs slapped on low-cost Asian suppliers by IEEPA. The companies see plenty of the same risks ahead with Trump determined (as confirmed by a few of the Cabinet including Bessent) to get tariff revenue back up to their original levels using existing legislation (without any additional use of Congress of course).

The GAP and tariffs:

“Gross margin of 40.5% declined 130 basis points versus last year, coming in ahead of guidance…The 100 basis point decline in merchandise margins reflects an expected headwind from the net impact of tariffs of approximately 200 basis points implying 100 basis points of underlying merchandise margin expansion.”

“First quarter reported operating margin was 12.7%. On an adjusted basis, operating margin was 5.2%, down 230 basis points compared to last year, primarily reflecting the net impact of tariffs.”

“We are updating our assumptions today to reflect Section 122 tariffs at a 10% rate on goods received after February 24 through the July 24 deadline. For the remainder of the year, we’ve assumed tariff rates revert back to IEEPA level rates incorporated in our original plan.”

“Tying these pieces together, we now expect approximately $80 million or 50 basis points of year-over-year net tariff relief to our gross and operating margin relative to our prior outlook for tariffs to be net neutral for the year. Given the timing of receipts -- this benefit is expected to be weighted towards the second and third quarters”

“We are keeping a close watch on the extent to which companies may reinvest this year’s tariff upside into pricing actions.”

Costco on tariffs:

“Our plan is to return to our members in some form, the portion of tariffs that were passed on to them. How much we return and when depends on a variety of factors, including how much refund money we receive and when it arrives as well as developments in the lawsuit filed against the company regarding the return process.”

“We’re closely monitoring the longer-term inflationary impacts of higher oil prices as well as the future impacts of tariffs. Our buyers continue to demonstrate their ability to adapt and are using their significant experience and expertise to try to reduce the impact on prices for our members. Our goal is to be the first to lower prices and the last to raise them…”

Best Buy on costs and prices:

“In Q1, our blended computing ASP was flat to last year, largely as a result of product mix and the staggered implementation of these product price increases.

“I will touch on how we are navigating the impacts of memory cost increases, which mostly impacts our computing category. As expected, product costs have been increasing and product price increases have been flowing into our assortment.”

“We’ve seen evidence of this with our customer behavior in the past situations, most recently in response to tariffs. We have also made some strategic decisions to pull forward supply in certain areas to alleviate these impacts, as you can see from the growth in our inventory on our balance sheet in the first quarter.”

Dollar Tree on costs and tariffs:

“Against a backdrop of ongoing uncertainty around fuel costs and tariffs, we will continue to protect value while strengthening the quality and relevance of our assortment. In this environment, our powerful combination of value, convenience and discovery continues to resonate with customers across all income levels and a wide range of shopping occasions.”

“…we are assuming that the current tariff rates remain in place through July and then increase in the back half of the year to the levels predating the February 20 Supreme Court decision. Additionally, we’ve not included any tariff refunds in the outlook.”

Burlington Stores:

“…we expected tariffs to be less disruptive to pricing and supply this year. Well, check, that is what we are seeing. The supply of off-price merchandise is excellent right now.”

Kohl’s:

“The total tariff refunds we are eligible to receive is $190 million. We did not receive any tariff refunds within the first quarter… There’s no tariff refund in any of the estimates that we had given today. Obviously, we talked about the fact that we did apply for those but we haven’t received those refunds yet. So those will be all on top of the numbers that we have guided today.”

“We serve a middle to lower-income customer. So this is very important to them. So we’re going to make sure that we continue to lean in on that. So I think those kind of become your balancing factors, and that’s really where you get to the guide of that flat to slightly down giving us some room”

Walmart:

“on tariffs, we are availing ourselves of the process to get refunds. We would definitely bias and try to prioritize price investment for that, given what we’ve seen both in terms of the pressure on consumers from fuel prices, but importantly, as well as the retention and the share gains that we’ve had, we think the single best return that we can have on a $1 of capital right now is to invest in the customer and invest in price.”

BJ’s:

“…we invested considerably in value during the quarter by returning tariff refunds to our members through pricing… we made the investments in price not really in response to any particular competitor, but really just to use the opportunity we had from the tariff refund to invest in our membership for the long term.”’

TXJ:

“we have submitted for tariff refunds, but our guidance currently does not assume any benefit from any potential refund and nothing more to add on that…”

Home Depot:

“obviously, as we stand today, we could say we could see potential cost pressures building in the form of fuel prices and other commodity input costs, new tariffs have been introduced. But the environment is changing almost every day. And so it’s hard to see where all of that winds up and where it settles…”

“…we see increased fuel costs, not only hitting us directly. Obviously, we obviously have a considerable amount of transportation expense in our P&L but also in the form of input costs. At the same time, number one, it’s still very early in the year. And number two, there are some potential tailwinds here. We’ve talked in our sector about tariff refunds. We have filed for those tariff refunds. And while we don’t disclose the amount and while we have received an immaterial amount to date, we have assumed… that could provide a significant offset to those costs.”

Sample comments on consumers generally…

The GAP:

“From what we can see today, the consumer remains resilient…”

Costco:

“…we don’t give guidance on what we expect future trends to look like…I would say, in broad terms, what we’re seeing at the moment is just a continuation, I should say, of the trends that we’ve seen in really the last year or so, members being very willing and having the capacity to spend.”

Dollar Tree:

“…we recognize the consumer environment remains dynamic, especially for lower income households, navigating higher fuel costs and broader macro uncertainty. Customers are shopping thoughtfully and closer to need, with a continued focus on affordability, convenience and trip efficiency. Customers value the ability to shop nearby and quickly to stretch their budgets through smaller and more affordable pack sizes and to still find a compelling assortment and discovery throughout the store.”

“On your question about fuel, there was some sort of small volatility in the quarter, but it really wasn’t a factor so much this quarter because of the timing of the conflict and the increases in the fuel rate. We’ll start to see that coming in the back part of the year.”

Burlington Stores:

“…we’re perhaps a little more wary now than we were in March, based on higher gas prices and the potential impact on inflation. We’re watching the trend very closely and looking for any change in consumer behavior, we haven’t seen it yet. But as an off-price retailer, that is what we do. We watch to see how the trend changes. And the benefit of the off-price model, when it’s well executed, is that we can tap the brakes or we can hit the accelerator if we need to.

Kohl’s:

“We continue to see choiceful discretionary spending from our core low to middle income consumer as they remain financially pressured.”

Dick’s Sporting Goods:

“We continue to see a healthy consumer across income demographics with no signs of trading down alongside particularly strong engagement from our younger athletes. Our consumer is really responding to newness and innovation, which is showing up throughout the DICK’S business with broad-based growth across footwear, apparel and hard lines. Given our continued confidence in the DICK’S business, we are raising the low end of our expectations for comparable sales and now expect growth of 2.5% to 4%, up from 2% to 4% previously.”

“…the outlook that we have provided continues to kind of indicate that level of confidence around the core strategies, and we are balancing that against the macroeconomic and the geopolitical landscape.”

Walmart:

“the consumer, especially here in the U.S., they’re telling us they’re feeling some pressure, and they’re looking to Walmart for value… the consumer, increasingly, it depends upon which consumer you’re talking about. We see with our customers that the high income customer is spending with confidence into many categories, while the lower income consumer is more budget conscious and perhaps navigating financial distress.”

BJs:

“While the consumer in the broadest sense has been resilient in the face of continuing challenges, we continue to see a more pressured environment for the lower income households. Elevated costs are weighing more heavily on that segment, and we’re seeing more value-seeking behavior as a result.

TJX:

“… our values and merchandise assortment resonated with consumers across all of our retail banners, and that each of our divisions grew their customer base. Looking ahead, the second quarter is off to a good start, and we have many initiatives underway that we believe can continue to drive sales and customer traffic… we’ll have more consumers looking for value is an opportunity for us going forward…”

Home Depot:

“The underlying demand in our business was relatively similar to what we saw throughout fiscal 2025 despite greater consumer uncertainty and housing affordability pressure.”

“underlying demand was relatively similar to what we saw throughout 2025. So that suggests that our consumer has been remarkably resilient. There’s been a lot thrown at them. But if you look at PCE growth year-over-year, that was similar in the first quarter, that was similar to all of last year. Employment is hanging in there. Wage growth has been reasonably strong. And you look at our core customer, they’re probably amongst the healthiest of all consumers. So they tend to own their homes. They did have that 50% value pop in the value of their homes over the past several years. And their portfolios of equities have also improved

• With more investors locked in on gauging the health of the consumer, the wider expanse of retailers has held up reasonably well in the equity markets. We look at a wide cross-section for 1-week and YTD returns. We use a mix of Retail ETF holdings to frame a representative checklist of single names.

• During a period when the consumer is under scrutiny and is always the linchpin to achieving decent GDP growth (PCE is around 68% of GDP), it is worth watching how the broader peer group of retailers are being viewed in the equity markets. After all, someone owns them and is studying them in what is a large, diverse, and fragmented sector.

• We get the second GDP estimate for 1Q26 this week. We also get fresh updates on personal income and outlays along with PCE inflation. That should offer some infill on how the consumer is spending (PCE) in the face of real disposable income (DPI) facing higher inflation in the “household basket.” Meanwhile, a slew of other retailers report earnings this week led by mega cap Costco.

• We are coming off a mixed week in retail earnings in a market that is hypersensitive to any signals of weakness or retrenchment in consumer behavior. We heard some caution at Walmart and BJ’s. Both of those retailers serve as sentiment-shaping indicators and bellwethers for the price-sensitive shopper. We saw a -10.1% return last week for BJ’s stock, which was in last place in our peer comps below the -8.5% for WMT in 2^nd to last. There were also some good performers last week as detailed below.

The above chart frames two Retail ETF performance histories vs. the S&P 500. We plot the running returns of VanEck Retail ETF (RTH) and State Street Retail ETF (XRT) against the S&P 500 from the end of 2024. The timeline captures the onset of the Trump tariff policies, including the turmoil of the initial reciprocal tariff shock in April 2025. That was ugly before the tariff policy backpedal set in to relieve the market stress. Later those IEEPA tariffs were ruled illegal by SCOTUS, but Trump continues to try his hand using legally established tariff laws (Section 122, 232, 301). Even those efforts have had mixed results in court.

The April 2025 “reciprocals” brought material selloffs in the S&P 500 and retail names alike (see Reciprocal Tariff Math: Hocus Pocus 4-3-25, Tariffs, Pauses, and Piling On: Helter Skelter 4-11-25). The challenge for retailers and tariffs is the lag time and uncertain flow-through effects across working capital cycles. Then there are the strategies implemented by retailers and wholesalers to deal with such risks while mitigating the pain in profit margins.

The Nov 2025 sell-off in the chart was arguably more about interest rates and how that would flow into the consumer sector (see Market Commentary: Asset Returns 11-23-25, The Curve: Slopes Can Get Complicated 11-26-25). The other swoon in the chart in 2026 came with the Iran attack and the intrinsic burden on consumers. Discretionary household cash flow and its impact on households is the consumer story – not economic theories on inflation and monetary guesswork.

The lower probability of FOMC easing matters. That flows directly into working capital financing costs for retailers and higher borrowing costs for consumers (notably in durables and housing-related financing whether for homes or home improvement etc.).

Retail ETFs influenced by mix…

While there is little question that retail equities overall have underperformed the broader market, the ETFs and leading issuers offer some signals. For ETFs, it is important to check on material variances in company or sub-sector mix. That clearly applies to Retail ETFs.

We prefer XRT for our purposes as we attempt to gauge how the equity market might serve as a proxy for many underlying names in these portfolios. The retail subsector mix and relative performance ties into equity holders watching fundamental trends. XRT is very well diversified with the top holdings showing less than a 2% share of the total portfolio across a very wide range of names including small caps and value plays.

In contrast to XRT, RTH shows an asset concentration of Amazon shares totaling almost 24% of the ETF and almost 12% in Walmart. In other words, over 1/3 of the portfolio performance is set by a single Mega Cap (Walmart) plus the mother of all Mega Cap retail names (Amazon). RTH can offer a useful way of tracking retail industry leaders, but XRT covers a wider range of names and thus reflects a broader mix of customers, products, and markets.

The daunting aspect of “retail” as a bucket is the wide array of sub-industries across auto retail (from cars to aftermarket parts supplies), apparel, broadline retail, food retail, consumer staples, tech and electronics, and general merchandise. That is why the securities firms in the “old days” would have so many retail equity analysts.

Framing peer groups…

In the names that we select in the chart below, we leave out auto vehicle retail since we tend to look at those through the prism of the OEMs and their independent dealer networks (e.g., see Credit Crib Note: Lithia Motors 9-3-24). The ETFs include some of those franchised dealers and also Carvana as a unique (and still evolving) auto retailer.

Suppliers such as O’Reilly and AutoZone are typical retail holdings and fit the traditional retail model. The auto chain is important to the consumer, but we try to get a read on the new and used markets more directly from the OEMs in terms of what they reflect about the consumer.

Questions to ponder…

With tariffs as a fact of life for retailers and now oil spikes flowing into inventory pricing considerations, there is no shortage of moving parts as we try to gauge how those factors can impact inventory costs and operating costs. That can translate into retailer pricing strategies (as in higher prices) to recoup costs.

There are also tariff mitigation strategies that result in cost cutting (headcount reduction, store closings, etc.). The mix of inflation pressures and payroll setbacks (unemployment broadly) are just part of the Newtonian realities of higher supplier chain cost. If costs go higher, someone will bear that cost whether the customer or the retailer or the shareholder.

In contrast to the White House, the retailers and wholesalers know the “seller” does not pay the tariff. The importer writes the check. Some retailers have more flexibility and resilience by not being the importer (e.g. stock through a wholesaler), but the reality of rising inventory cost pressures do not disappear. It gets absorbed somewhere along the chain.

Given the high number of retailers and very wide array of product sourcing by region/country, there are a handful of questions to consider for different sub-industries and outlying winners and losers in the retailer lists:

• Are tariffs pressuring inventory costs?

• Does the retailer have other lower cost alternatives from a different country?

• Has pricing alone been sufficient to offset tariff margin damage?

• How are apparel retailers dealing with the old or new/evolving tariffs placed on the low-cost textile players (notably in Asia, see Tariffs: Some Asian Bystanders Hit in the Crossfire 4-8-25)?

• Will the coming USMCA review be a major risk?

• How does the company see the downstream materials cost pressure (petrochemicals) flowing into inventory costs across a range of goods?

• How are freight costs trending? Have diesel costs and warehousing costs been impacted so far? How do they see those trending with holiday ordering decisions on the horizon ahead of back to school, fall and winter holidays, or the usual seasonal lead times?

The array of retail sub-industries and diverse product offerings can be overwhelming, but some random sampling is always worth some effort in the transcripts and press releases. There is also the simple question of how the stock price action is framing up in the group. This reporting season is getting warmed up with more this week (Costco, Burlington, Dollar Tree, Best Buy, GAP, Dick’s Sporting Goods, and more).

The retail sector the past week had some notable releases with Walmart, BJ’s, Ross Stores and Home Depot at the top of the list. We put together a “comp list” to track 32 asset lines including two retail ETFs as we detailed earlier.

Over half of the names are in the large cap bucket with most of the rest being midcaps with only one name smaller than $5 bn in market cap (Kohls, KSS). We will fine-tune the list in future commentaries. This is our first cut at a broad retail peer group to track. There were some interesting ones left off, but we will adjust the list over time for material moves.

The score for the week of 22-10 was a good sign all things considered. That is despite the bellwether low price players Walmart and BJ’s taking a beating on the week. Getting a read on the trade-offs of cost pressures vs. consumer behavior will take more digging into the transcripts than we can do for today’s commentary.

The YTD profile of total returns in retail shows a mix of winners and losers that was essentially evenly divided with a score of 17-15. There were “only” 5 double-digit losers in the bottom quartile.

The good news was that it took +16.5% to make the top quartile. The median in the 32 asset lines is barely positive, so it is not exactly a cause for celebration. For those of us who grew up on the credit side of the business, the question for retail exposure was often simply “Who will Walmart or Amazon bankrupt next?” Those retailers who have adapted to the digital world and found the right formula for their strategies to succeed and adjusted to the changing times have performed well. One of the ETFs we have not given much focus to is the small IBUY ETF with names such as Maplebear (ticker CART, Instacart owner), Carvana, Etsy, and eBAY among others.

The only certainty for the retailers is that every year will be brutally competitive as they adapt to the world of tariffs while keeping an eye on their core product offerings, cost structures, and financial risk profiles.

The array of bellwether legacy brand bankruptcies and/or liquidations is well known to the retail world and investors across the years (JCPenney, Nieman Macrus, Saks, etc.). It does not take much of a Google or AI search to see the retail sector financial carnage across the cycles. It is a long list of Chapter 11 stories and liquidations.

• D.R. Horton (DHI) is the perennial #1 builder by units ahead of Lennar. As we saw in the most recent fiscal quarter, DHI is also occasionally #1 by quarterly home sales revenues. DHI also is by far the #1 homebuilder in market capitalization value at over $38 bn (5-20-26) vs. $20 bn for Lennar and $21 bn for Pulte.

• The breadth of DHI’s scale and low average ASPs vs. major peers offers a good vantage point on the health of national homebuilding. Regional ASPs run from around $296K in the South Central geographic segment to $543K in the Northwest segment.

• As an industry proxy, DHI results show the moderate softening in homebuilder fundamentals with gross margins facing pressure, pricing softer, and incentives still a key source of support. The result broadly has been weaker gross margins.

• DHI’s 2Q26 and 1H26 period (DHI 9-30 fiscal year) show lower home sales revenue, a lower average selling price, and mixed volumes by region. At least sales orders and backlogs are higher YoY.

• The slower market allows DHI to stay aggressive on share buybacks as working capital demands are muted. That still supports strong discretionary free cash flow generation. Volumes for the remainder of 2026 will be subject to cyclical factors and how mortgage rates play out against FOMC policy with UST curve trends facing Iran and tariff effects on inflation. For now, mortgage rates have moved 75 bps higher off the lows to 6.75% this week before easing back to 6.67%. FOMC odds for now favor hikes over easing.

• Balance sheet trends at DHI feature impressive asset coverage with home inventory over 6x total homebuilding debt. The intrinsic cash flow flexibility of DHI’s working capital management presents strong single A tier credit risks for a company that has proven itself across myriad macro backdrops after a wild cycle since 2019 with a pandemic, an inflation spike, Fed tightening, and adverse tariff impacts on supplier chain costs.

The above chart frames the equity return performance of DHI since the start of March 2022 during the month ZIRP ended. The visuals are a bit too busy, but the boxes on the left cover the hard facts. The housing bill that is supposed to support affordability brought some good headlines today that saw the homebuilders pop with DHI and LEN up over +5% and XHB at +4.3%. Mortgage rates have tailed off slightly from this week’s highs.

The homebuilders have lagged the broad market S&P 500, but DHI has been a superior performer vs. the Homebuilding ETF (XHB), which includes suppliers. Of the biggest two homebuilders by revenues, DHI materially outperformed Lennar. We look at the broader peer group and more time horizons in the next table.

The timeline and peer returns show a wide range with very little good news in 2026 for homebuilders. All the builders are negative YTD ex-Beazer which comes with the asterisk of a takeover attempt (by DFH) of a company that has posted negative returns over the trailing 5 years. The worst performer in the pack has been low cost/low price operator LGI Homes. Beazer (BZH), Hovnanian (HOV), and Smith Douglas (SDHC) show the smallest market caps and are closer to the half billion mark.

The weak performance of Lennar (LEN) as a major national builder is a sign of builder trouble. The same is true with NVR and KBH with less regional diversity relative to DHI.

The above table details the trends for the revenue and earnings lines. The home sales gross margin history shows a move from a 20% handle in 2019 up to a FY 2022 peak just below 29% and now back to the 20% area in 2Q26 (20.1%) and 1H26 (20.3%). The 1Q26 and the 2Q26 gross margins benefited from lower-than-expected warranty and litigation costs that added 40 bps to gross margins. That explains the slightly lower guidance below the 20% threshold for 3Q26.

DHI is guiding to 19.7% or higher in 3Q26 as the seasonal peak continues into the summer. The cost side of the equation in FY 2026 has been construction cost savings but modestly higher lot costs. Profitability metrics overall are solid even if below the distorted levels of the post-COVID period of 2021-2022.

We have reviewed DHI results across the post-pandemic years in the links at the bottom of this commentary. The fact remains that total revenues and gross profits have almost doubled during the period since 2019 in a very impressive performance considering the mortgage rate swings. “Homes closed” rose by almost 50% from FY 2019 to FY 2025 and average selling prices are higher by around 22% into 2Q26 vs. 2019.

The above table runs through the income mix for the “Operating Segments” before we detail the Homebuilding “Reporting Segments.” Homebuilding is clearly the dominant operating segment with majority-owned Forestar (62% owned, ticker FOR) a separate, publicly traded company. FOR is an important part of the homebuilding land/lot supply chain but still one that provides only a small minority of DHI’s requirements.

We get an impressive amount of revenue and profit disclosure across the business lines in the consolidating financials presented each quarter. Those individual segments are distinct business line operations with stand-alone funding. Those units are borrowers with no guarantees from the homebuilding operations. We produce a sample consolidating balance breakdown in the last chart.

The DHI operating segments are all focused on homebuilding and related activities along the builder supplier chains from finance to land/lot development. The Rental segment is part of the build-to-rent (BTR) business.

Build to rent is a small business in the overall mix…

The pending housing legislation in Washington (21st Century ROAD to Housing Act) has been a challenge in terms of reaching legislative consensus. The Senate bill attempted to deter institutional capital from expanding their housing holdings and thus reducing affordable supply.

The Senate bill as written undermined the economics and attractiveness of the BTR business without appearing to grasp the distinction between total new housing supply and legacy existing home supply for sale. The simple guideline should be how to increase housing supply overall – not limit housing stock growth while limiting rental options.

The House version justifiably pushed back on rules such as mandatory sale of the home by year 7 in addition to other disincentives. The “forced sale” provision came under withering criticism since BTR strategies expand the housing stock as well as consumer choice. The House took that out after discussions with the White House. A few senators still seem to object, so the bill is not done yet per the headlines today. Now that the House version is done, it needs a fresh sign-off by the Senate.

Housing interests mounted very rational and economically coherent arguments detailing how such actions on BTR are bad for housing supply (see NAHB Applauds Lawmakers’ Push to Remove Harmful Mandate from Major Housing Package 4-23-26). The mere existence of such a provision would be damaging to new home investment potential, undermines credit availability for the space, and damages exit strategies for those who have invested.

For DHI, this threat was not a material risk, but it would chill new projects in the industry. Buying existing homes into investment funds makes sense to curb given the goal of the bill (available supply to buy), but building new supply supports longer term housing supply-demand dynamics. As the smoke clears on the back and forth of the bill language with the White House and Senate, final language still needs to be voted on by the Senate and then the White House.

Per Politico (5-19-26)

The updated text of the 21st Century ROAD to Housing Act includes changes to a provision aiming to limit Wall Street’s ownership of single-family homes so it now more closely resembles the Senate’s version. The House version still strikes the Senate language requiring single-family homes that large institutional investors built as long-term rentals to be sold within seven years to individual homebuyers.

While BTR is a very small part of the DHI total business, the compromise is favorable for long term supply and poses a much smaller threat to the supply-demand dynamics of the existing home sales levels that dominate total housing inventory.

The bigger problem is the question of Congress mastering the basics of supply and demand and allowing homebuilders to decide how to make investments that work for them as well as housing needs and consumer choices. If Congress watched the deficits more closely and discouraged geopolitical policies that spike oil costs and negatively impact the UST curve, mortgages would be more affordable.

The above table details the earnings of the regional reporting segments for homebuilding. The next two tables cover the volumes and average sales prices. While volumes will necessarily track the largest housing markets, the ability of DHI to sustain steady organic growth over the years has been impressive.

DHI has not been an active M&A leader on the scale of Lennar but just keeps on growing. The company even cited a move into some of the lowest price tiers in Texas on the earnings call. There are ample opportunities to expand, and they also cite the North region as one where they have the opportunity to grow share.

The above table details the sales volume of homes closed by region. Homebuilding is in its simplest terms a “price x volume” business with an analytical framework that wraps around gross margins and the working capital cycles and cash flow deployment.

Longer term volumes are heavily driven by favorable demographics, but short-term demand sensitivity can be heavily influenced by monthly payment trends even more than ASPs since the sensitivity of affordability is more tied to mortgage rates.

Mortgage rates just hit 6.75% this week after making brief “attempts” to get below 6.0% across the current cycle. They edged down today to 6.67%

The South Central region is out in front at #1 in the geographic segment that includes Texas. The Southeast ranks #2 in the segment that includes Florida. We break out the mix of states and how they roll up into the segments in the next table.

The above table details the DHI average sales prices across its various geographic regions. We also show which states are in which regions since homebuilders can often be “creative” in how they classify the map.

As the builder with the largest scale by units and a broad national profile, DHI also posts the lowest aggregate ASPs of the majors. DHI was even lower than LGI Homes this quarter. As noted in the chart, the highest ASP was posted in the Northwest segment at $543.4K and the lowest ASP is South Central at $295.7K. That shows a diverse range of product offerings in the broader national homebuilding operations.

The above table details the timeline on the asset base and the steady expansion across a cycle since 2019 that saw macro conditions and mortgage rates vary in dramatic fashion with the pandemic, inflation, tightening, and ensuing easing ahead of this latest round of mortgage rate pressure.

The above table updates the running cash flow metrics of DHI and once again reinforces the extraordinary resilience of discretionary free cash flow across a wide range of economic backdrops.

The easy generalization is that markets which are slowing down generate free cash flow. In contrast, ramping up construction and inventory of lots reduces cash flow given the high investment. That gets back into “old school” inventory turnover trends which the homebuilders routinely discuss as they make their cases for their improving efficiency.

The line in the table for “repurchases of common stock” makes a statement on how cash gets deployed, and that is at a time when homebuilder equities are under pressure. As we have discussed in earlier commentaries, the running returns on the Homebuilding ETF (XHB) saw a LTM near +70% return in the fall of 2024 before life got challenging again with the UST curve steepening into 2025 and homebuilder returns getting undermined (see Footnotes & Flashbacks: State of Yields 9-29-24 , Footnotes & Flashbacks: Asset Returns 10-27-24). As DHI rolled into 2025, we see the shareholder rewards line get more important in the direction of the cash flow deployment.

The above table is provided as a sample of how the balance sheet line items cut across the business lines. The different business units outside the Homebuilding segment are not guaranteed by the homebuilding entities. That makes the asset protection for DHI bondholders much stronger.

We covered those non-guarantor details in an earlier Credit Profile on DHI (see D.R. Horton: Credit Profile 8-4-23). The income statement has the same type of breakouts each quarter, but in substance all the units are about building, financing, or renting homes.

See also:

D.R. Horton 3Q25: Material Slowdown Still Good Enough 7-22-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

Credit Crib Note: D.R. Horton (DHI) 8-8-24

D.R. Horton: Ramping Up in 2024 Despite Mortgages 4-19-24

D.R. Horton: Credit Stronger Even if Stock Takes a Step Back 1-29-24

D.R. Horton: Credit Profile 8-4-23

Single Family Rental: A Major D.R. Horton Asset Sale 6-6-23

D.R. Horton 2Q23: Company Comment 4-21-23

D.R. Horton: Bellwether Leader Weighs in but Real Test is Ahead 1-27-23

• Synchrony (SYF) posted a 1Q26 performance that sends favorable signals around the consumer sector and related spending trends while asset quality metrics held in quite well. A big test lies ahead in 2026 on a range of consumer headwinds and payroll worries that lurk. Household discretionary cash flow will be feeling the affordability pinch, as will many business lines, from the Iran fallout.

• SYF has been our favorite bellwether to monitor given the mix of accounts, the scale of operations, and the disclosure granularity by sales platform. SYF’s narrow credit card focus offers more data to track across a range of subsectors in retail, health care, and other services. We covered the steadily expanding partner network in an earlier detailed report on SYF (see Synchrony: Credit Card Bellwether 10-30-25).

• For 1Q26, we see charge-offs down YoY, 30-day and 90-day delinquencies essentially flat YoY, net interest margins higher YoY, and an allowance cushion that is almost double charge-offs.

• Betting against the US consumer has typically been a bad idea even if occasionally betting against underwriting standards of various lenders is sometimes a good idea. Synchrony financial has not been one to bet against, however, even when consumer sentiment is at an all-time low, the affordability of the “household basket” is trending in a negative direction, and payrolls have been stagnant in cyclical context.

The above chart highlights the superior performance of Synchrony in the equity markets relative to other major consumer finance companies. We include Capital One in the chart as a good comp. We also include the Financials ETF (XLF) and Regional Bank ETF (KRE). We looked separately at a number of consumer finance operations and related asset quality metrics across the financials peer group. Each consumer lending operation can have its own flavor (credit cards, auto, instalment credit, etc.), but we see “cards” as one of the best gut checks on spending and asset quality.

For SYF, steady asset quality and very high net interest margins have brought rewards to shareholders across time. As detailed above, SYF has shown its resilience across the period from the end of 2019 and across a pandemic, an inflation spike, a Fed tightening cycle, and now into a low payroll and low consumer confidence stretch. From the end of 2019, SYF equity total returns soundly beat COF, the XLF ETF, and KRE.

The above SYF stock return chart plots the performance from the start of the tightening cycle in March 2022. SYF materially outperformed the Financials ETF (XLF), Regional Bank ETF (KRE) and Capital One (COF). The table below cuts across more short term and longer term time horizons and we expand the universe of comps to include the broader equity benchmarks as well as dropping in American Express and Ally. We line them up in descending order of total returns for the trailing 1-year period.

For the most recent activity, the news out of 1Q26 and the related guidance was favorable. With 1Q216 earnings, SYF announced a dividend increase of 13% and a major upsizing of its stock repurchase program to $6.5 bn.

Our interest in SYF is mostly about its role as a bellwether for credit card trends in the “normal people” crowd and not the “black card” types. The spending in areas such as the Home & Auto platform and the Health & Wellness market reflect some of the more challenging and sometimes unpredictable spending buckets in the typical household experience. The market is facing the headwinds of rising costs. We break out those platform and sector trends further below.

Given the “all-time low” headline around consumer sentiment, low employment growth, AI and services fears hitting various stocks and flowing into layoffs (Meta and Microsoft), and the recent Iran War fallout, the next two quarters will be a test in asset quality and delinquency trends. For now, the asset metrics mix is holding in quite well. Iran damage, tariff cost mitigation actions (i.e., layoffs) and AI capex causing payroll expense offsets roll up into a complex set of moving parts for the consumer in 2026.

The above table updates the chart we introduced in the Oct 2025 report (see Synchrony: Credit Card Bellwether 10-30-25). We see steady trends overall across charge-off metrics, allowance adequacy, and 30-day and 90-day delinquencies. The 1Q26 period saw charge-offs as a % average loan receivables improve more notably from 1Q25. Delinquency metrics were essentially flat YoY. Allowance coverage improved.

The above table highlights income statement line items and some key headline operating metrics such as purchase volume and average active accounts. SYF has shown discipline in its growth and is not chasing accounts at the expense of prudent risk management. The average active account numbers in 2025-2026 are below 2023-2024 with purchasing volume steady after a 2023 peak.

Net interest margins are an eye-opener at 15.5% with net charge-offs at a low 2% handle. The very brief threat earlier in the year by Trump to propose a10% cap on interest rates went away quickly. There were questions around whether it could even be done legally without legislation. Someone also more likely than not explained to Trump that such a move would damage the consumer finance sector, the banks, and in turn set off a wave of credit contraction that would crush the Personal Consumption Expenditure line (“PCE”) that contributes around 68% of GDP. That 10% cap threat briefly whipsawed some financial equities earlier in the year including SYF and COF (see Policy Mud on the Wall: Consumer Debt, Residential Mortgages 1-15-26).

Another key factor for the consumer finance companies and deposit heavy funders is the direction of FOMC policy and what it all means for funding costs and interest margins. The potential for easing has become more uncertain with the Iran War and how that could flow into Fed actions. The multiplier effects of inflation and energy cost fallout could also flow into consumer credit quality as well as spending appetites.

Other contingent threats ahead include AI multiplier effects into payrolls and distressed drawdown risks on credit cards. The 2026 consumer credit quality challenge is not straightforward. The good news for SYF security holders and lenders is a good track record across some wild macro backdrops even if just since 2020.

The above table breaks out the trends for the 5 sales platforms since 2019. The scale in each bucket is reflected in the purchase volume and relative receivables balance. A quick scan of the purchase volume and receivables columns comparing 2019 to 2025 tells the story.

The expansion of the partners and range of purchasing channels continues across everything from Health & Wellness (including dental groups and veterinarians) to the usual retail partner programs (Diversified & Value), and online marketplaces (Digital). Home & Auto is tied into demographics in a “driving country” and the rising cost of services and parts and merchandise.

As detailed on the 1Q26 earnings call, the expanded base of partners leaves SYF well positioned for growth in 2026:

We continue to expect accelerated growth in purchase volume and average active accounts without any further broad-based credit refinements as we move through the year. The outcome should more than offset the impact of elevated payment rates to drive mid-single-digit growth in ending loan receivables by year-end. The rate of receivables growth should follow seasonality and accelerate as we move into the back half of the year. This will be driven by growth in our core portfolio as well as a combination of both recently launched and soon-to-be launched programs, including Walmart OnePay, Bob’s Discount Furniture, RH and approximately $725 million of those commercial co-brand loan receivables, which was added in early April.

The new partners list keeps growing as SYF targets more retail product segments in each category across goods and services.

A quick balance sheet update…

Below we update the borrowing and leverage trend line. We wrote the commentary given SYF’s role as a bellwether for consumer asset quality, but the solid balance sheet, capital ratios and financial flexibility excite shareholders given the very favorable excess cash flow and capital ratios that allow SYF to rewards shareholders via dividends and buybacks.

The above table updates the routine quarterly disclosure on SYF capitalization metrics. SYF is very well positioned.

The above table drives home how cash generation has made life pleasant for shareholders as detailed earlier in the relative stock performance charts.

The above table breaks out the balance sheet line items with the most notable trends from 2019 being a larger earning asset base funded by a higher mix of deposits and a lower mix of total debt.

The above table details the mix of borrowings across the capital structure for the holding company and the bank level debt borrowing outside the much-enlarged deposit base detailed in the prior chart.

Synchrony gives some confidence to the market on credit quality with a lot of action to play out ahead with the payroll actions by large employers and small businesses wrestling with tariffs, the Iran War, and AI ramifications.

See also:

Market Commentary: Asset Returns 4-19-26

Industrial Production March 2026: Mixed Picture, Big Questions Ahead 4-16-26

Existing Home Sales March 2026: New Beginnings or New Ends? 4-15-26

Producer Price Index March 2026: Heater or Curve Ball? 4-14-26

CPI March 2026: The CPI Cycle Could Prove Maddening 4-12-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

Employment Situation March 2026 4-4-26

Payroll Focus: ADP Highlights March 2026 4-1-26

JOLTS Feb 2026: Openings Down, Hires Down, Layoffs Up 3-31-26

UST Deltas: Elevation Realities 3-29-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

New Homes Sales Jan 2026: The Nays Carry 3-19-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

Housing Starts Jan 2026: Total Starts Up, Completions Up, Permits Down 3-12-26

VIX: Market Still Not Getting the Vapors 3-6-26

Meanwhile…Back in Economics and Tariffs 3-2-26

• Synchrony (SYF) as a bellwether and consumer indicator: With all the debate going on around consumer asset quality, the direction of “sentiment/confidence” benchmarks, and the propensity of households to spend, we keep looking for good indicators closer to the trenches. That is, we want to add more information to track beyond the monthly PCE release (income and outlays) or the PCE lines in GDP updates. We thought it worthwhile to add a leading consumer credit bellwether to the collection. Transaction trends (volume, frequency, payment rates, value growth, etc.) tell a story, and the 3Q25 numbers at SYF support the consumer resilience theme.

• Company reports beat BLS and BEA data these days: We like using bellwethers generally across industries to get a read on the macro direction of household habits and the consumer sector. We chose a leading credit card player that can be used as another indicator. SYF is close to being a pure play on credit cards, so they are a good pick as a large cap with a long history (as a unit of GE before the 2014 IPO and 2015 split-off). SYF also offers extensive, granular quarterly disclosure generated off a wide range of “partners” in retail and spending groups in their five “Platforms.”

• SYF has a very wide range of partners and customers in their channels: SYF touches almost 70 million consumers, so that is a useful starting point for extrapolation from the consumer level while we also track big ticket sectors such as housing and autos. SYF only has a single digit % mix of lower credit tier customers, so the challenge of subprime risk is a separate channel to track with other issuers. The “partner” mix includes major mega-retailers including digital leaders with household names such as Amazon and Walmart/Sam’s Club in the mix. Headline names come along with myriad regional retailers and selling groups. SYF details the range of partners and related location counts on its site.

• Credit trends at Synchrony are stable: The “stable outlook” from the rating agencies for SYF are easily defended based on SYF balance sheet health and asset quality. We are not looking to play bank analyst on SYF or to place SYF credit quality or relative value in the peer group context of the banks. We are more zeroed in on what the operating performance, asset quality metrics, and the overall platform strategy of this major credit card and consumer finance bellwether says about the consumer sector resilience factor. That is a hot topic at this point in the cycle and notably with payrolls under a cloud and some subprime headlines creating some excitement (e.g. Tricolor).

• SYF operating performance has won over the stock market: Profitability, asset quality metrics, and balance sheet health paints a picture of stability in credit but the equity markets vote has been favorable also as we detail below. SYF’s risk profile as a bank (technically an S&L Holding Company under the OCC umbrella) brings regulatory checks (including the FDIC ) and a very high mix of deposit funding at the bank level at 85% of total funding. For macro extrapolation, SYF 3Q25 offers inputs on transaction volumes and payment rates, so the directional color adds value. In SYF’s case, they had been defensive in recent periods and had tightened credit, but they are shifting modestly again given the favorable credit trends they have experienced. As we have seen with a number of banks, SYF has been releasing reserves from a very large allowance. SYF’s reserve cushion is north of 10% as detailed below.

• Net interest margins and yields vs. charge-offs bring good news: As a financial subsector, credit cards are riskier than auto loans and residential mortgages. The net interest income margins in 3Q25 of 15.6% can be framed against a loan receivables yield of 21.9%. That type of yield and more than adequate reserves and prudent provisioning policies offer a comfort zone and a lot of room to absorb surprises.

• SYF equity performance in the context of broader benchmarks stacks up favorably: The objective operating numbers show impressive stability across a wild period of inflation, tightening, and tariff worries since 2019 that underscore consumer sector resilience. Over the past 5 years, SFY equity return beat the S&P 500, the small cap Russell 2000, and the Midcaps while also trouncing the Financials ETF (XLF). That performance comes in a mature business where SYF has executed well while embracing creative technology solutions and channel strategies to serve more consumers/borrowers. Basically, it is an interesting company.

• The asset quality trends have been favorable through 3Q25: The quality performance has allowed SYF to release more reserves and stay ambitious in its stock buybacks. Delinquencies and charge-off rates are down YoY in 3Q25 with a reserve allowance cushion of +10.35% vs. 3Q25 charge-off rates of 5.16% in 3Q25 (down from 6.06% in 3Q24). The platform strategies cut a very wide path and SYF works with such major players as Amazon and Walmart (a new product plan rolling out with WMT into 2026 after its earlier deal ended in 2018).

• The game is about capturing the consumer and the right partners: The visual above on “CareCredit” struck us as one of the opportunities that allows SYF to tap into such a wide range of partners. Healthcare is one of the largest sectors in the economy (18% of GDP). As we detail below, Digital and Wellness are two of the targeted growth areas. In the sections that follow, we run through some of the more interesting disclosures from what is described as one of the largest “monoline” credit card and consumer lending banks. There are bigger banks with higher credit card market share, but those are the banks that operate across a much wider array of business lines.

• Disclosure and details help: The big bank disclosure and granular operating analysis does not offer the array of angles you get with Synchrony. We will dig into Ally in coming days with their stand-alone consumer story, and we always have the “captives” at GM and Ford along with major equipment finance operators such as Deere Capital and CAT Financial for color on consumers and small/mid businesses. For a view on the consumer, we chose Synchrony as the best name to lock in on for a gut check on the consumer and related credit quality patterns at the household level.

• The 3Q25 earnings call brought phrases such as the following:

“…we still think the consumer is in pretty good shape. They’ve been very resilient.”

“…pretty optimistic in terms of the trends we’re seeing across the portfolio.”

“…we’re pretty optimistic in terms of everything we’re seeing from the consumer”

“…we’ve begun gradually reversing some of our tightening in areas where we see strong risk-adjusted growth opportunities.”

“…continued strength in our credit performance and acceleration of our purchase volume trends…was broad-based across our 5 sales platforms and all generations.”

• Vote of confidence from the equity markets: The above stock return chart covers the last stretch of time starting in 2019 just ahead of COVID. The SYF equity returns across the years underscore that Synchrony has been a solid performer vs. the broader financials group. The comps above include a notable consumer-exposed bellwether such as Ally, which is an on-the-run choice in the credit markets for many bond investors investing in middle-tier credits. SYF even edged out Cap One (COF) during that timeline. SYF also ran ahead of the broader Financials ETF (XLF). Not shown in the above chart is that SYF beat the S&P 500 and the Regional Bank ETF (KRE) since 2019. We look at more comps and timelines further below.

• Cap One as another guide: One major name that beat Synchrony over 10 years was Cap One (COF). COF has grown from a credit card player and “mailbox stuffer” with applications in the “old days” (the 90s) to now being a top 10 bank with a wide range of operations and a market cap over $140 bn. That compares to SYF at $27 bn and Ally Financial at over $12 bn. The impressive success of Capital One’s history is a reminder that a financial operator such as SYF has a lot of ways to grow profitably. Good credit systems and controls and execution have helped them so far.

• The broader time horizon performance: We look at the broader mix of financials and market comps across various time horizons in the table below. COF still shows the majority of its loans being in credit cards, but consumer credit (e.g. auto loans) and commercial banking are major operations also. The strategic question longer term for SYF vs. COF revolves around where SYF will seek to pursue loan growth. We see SYF as the better one as a consumer proxy for our purposes since they give so much disclosure and in-the-weeds detail. In terms of consumer health, the recent American Express performance and color from 3Q25 is on the “consumer is all right” bandwagon. The minimal AXP charge-off rates agree.

• The past cycle saw the consumer shine: The timeline below covers a busy cycle running across a pandemic that saw a return to ZIRP and then a post-COVID consumer spending boom that rolled into an inflation spike and ensuing tightening cycle. SYF held up very well across the timeline with the trailing 1 year showing Cap One, SYF, and American Express well ahead of the S&P 500. SYF put up very strong numbers over 6 months.

• Extrapolation value with a lot of data points: SYFs desire is to grow its receivables base in a profitable manner and at healthy net interest margins. That process comes with rigorous disclosure from SYF that offers an extensive array of angles to view the company and consumer spending patterns. The various retail groups and organizations in the partner network offer some useful extrapolation into a bigger macro picture around consumer spending. The PCE lines for goods and services generate 68% of GDP, and credit cards play a big role.

• Consumers face a credit test ahead: Markets had been getting consumer credit jitters and were starting to worry about an asset quality cycle that has proven to be relatively immune to the headlines across COVID and the tightening cycle. The latest test for consumers is payroll anxiety, tariff worries, health care cost escalation (notably health care premiums). The worries offer a good reason for us to start tracking Synchrony as one of the bellwether indicators of delinquencies and charge-offs. The lack of macro data from BLS and BEA is not helping at this time since the cyclical transition to slow growth is in evidence. That is, there is cyclical pressure in evidence once you adjust for the GDP distortions from declining imports that juice up headline GDP numbers (see 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25).

• SYF’s main focus is credit cards, so the feedback is valuable: We get broad top-down commentary on the consumer sector from the megabanks (JPM, BofA), but SYF earnings calls really dig into the nuances of credit cards and across the five platforms. Examples include how they view student loan borrowers’ credit attributes across time in terms of credit card performance. They also address borrower generation trends and customer profiles along with payment rate color (i.e., maintaining a debt balance vs. pay-down). The vantage point that SYF can bring to consumer habits cuts across hundreds of consumer segments and different products and services (e.g. health care and veterinarians). SYF paints a useful picture.

• Interest income was essentially flat in 3Q25 and 9M YTD 3Q25 YoY: Interest income climbed off the bottom from 2021 to 2024 along with interest expense. The return to ZIRP with COVID in March 2020 continued across the full FY 2021 period, and that shows up in the income numbers. The very high yields on credit cards never fails to impress at 20% handles (21.9% for 3Q25), and the main challenge for SYF is to be prudent in provisioning based on borrower quality, history, and mix. The moving parts of net interest income shows a net margin of 15.6% in 3Q25 after 14.6% in FY 2024 and 15.1% in FY 2023. The direction of net interest margins (“NIM”) will tie into the FOMC actions and how that flows into deposit costs. Lower provisioning and reserve releases have helped bolster earnings based on favorable asset quality trends.

• For 3Q25, purchase volumes grew but were lower YTD: The 3Q25 picture showed purchase volumes higher by 2% to $46 billion (vs. $45 bn in 3Q24). Average transaction value rose YoY for the 4^th straight quarter to a modest +0.4%. SYF cited improvement across all credit grades and generations in the portfolio. “Spend frequency” rose by +3.4%. Based on the portfolio performance, SYF even started to ease up on some earlier credit standards tightening. These data points go in the positive column for the health of the consumer sector.

• Receivables guidance calls for flat growth in FY 2025: As detailed further below the net receivable balance was slightly lower at -2% and total active accounts down by 3% to over 68 million. Receivable balances can be a function of numerous variables including new business asset transactions (buy/sell receivables), and payment rates by cardholders and how that flows into card balances and interest income.

• Asset quality improving: As we cover in the asset quality detail further below, charge-offs remained materially below the loan loss cushion from 2020 to 2025 that averaged above 10%. The provisioning line has some notable distortions in 2021on some major asset sales, some regulatory adjustments, and some reserve releases tied to very favorable charge-off trends in 2021-2022 despite the COVID hangover. Receivables growth kicked into gear again in 2022-2023.

• Retailer share arrangements (“RSAs”): The RSA line moves with volumes and partner terms. RSAs are described by SYF as follows: “Most of our program agreements with large retail and certain other partners contain retailer share arrangements that provide for payments to our partner if the economic performance of the program exceeds a contractually-defined threshold. Economic performance for the purposes of these arrangements is typically measured based on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for credit losses, retailer payments and operating expenses)…All of these arrangements are intended to align our interests and provide an additional incentive to our partners to promote our credit products.”

• Growth has slowed from the peak: The above table details the balance sheet since 2019. We see a sharp decline in 2020-2021 in loan receivables followed by a rapid rise in earning assets as we detail below in the platform breakouts. The decline in 2025 in loans is expected to reverse in trend during 2026 based on management 3Q25 commentary.

• The growth challenge earlier in 2025 was a good news/bad news outcome: The good news was that SYF was more defensive on credit and showed a desire to be prudent. The bad news was more for the equity side that wants to see growth, better asset quality, and higher net interest margins. Basically, growth lagged. Asset quality is objectively better (some reserve releases are not offsides), and now growth is resuming with some easing and new partner deals that should drive more volume into 2026.

• “Cuspy” parent credit ratings: The absence of a Moody’s rating on parent unsecured bonds (BBB- S&P, BBB Fitch) raises some eyebrows, but we were never one to set our sundial by what the agencies think. The BBB- rating will intrinsically affect bondholders at the margin, and that is just the reality. The “cuspy” holding company bond rating of BBB- from S&P do not seem to give much credit to Synchrony for its very successful navigation of a credit cycle that included a pandemic, an inflation spike, a major Fed tightening cycle, and recurring predictions by many of the impending doom of the consumer. In contrast, the equity market rewarded SYF performance.

• The bank level debt is BBB by S&P and BBB by Fitch: The holding company notch by S&P to BBB- vs. bank level debt also is one that will keep bondholders on alert in the absence of a Moody’s rating. Bondholders will naturally wonder whether there were some disagreements with the one agency. The logical scenario is that there was a dispute years ago when SYF was less “proven” outside of GE, and in the end SYF stayed with the two agencies who were fully on board.

• The credit story is favorable in the numbers even if the agencies are not helping: For our purposes (we are not playing bank analyst) it is the direction of consumer asset quality and operating stats that matter more (volume, mix, platform channel color). The excess capital, strong net interest margins, and the level of profitability allow for aggressive buybacks. At the very least, the objective numbers offer some favorable empirical support that SYF has a healthy financial profile.

• Favorable balance in funding strategies: The diversity of the capital structure is reassuring given the balance across the various funding markets from the dominant funding layer of deposits to unsecured debt markets at the parent and bank level. The current non-deposit mix is more optimally balanced than 2019 across funding sources in ABS, parent company bonds, bank level debt, subordinated debt, and preferred stock including fixed and floating rate (some on fixed to floating). For 3Q25, deposits were 85% of total funding, unsecured debt 7% and secured debt 8%.

• The moving parts across the five SYF platforms tell a balanced story: These breakdowns underscore the impressive range of SYF’s customer base and partners in their credit card operations whether dual branded or private label. Partners run the gamut from highly recognized national and global names (e.g., Amazon, PayPal, Sam’s Club, Lowe’s) to more obscure retailers and payment programs. Each platform disclosure allows investors to frame purchase volume (up 3% in total) and loan receivables (down -2% in total). We see 3 of 5 platforms posting higher purchase volumes. The average receivables balance in 3Q25 posted minimal movement YoY with 3 of 5 slightly higher. Interest income and fees posted small moves also with 3 of 5 lower in 3Q25 YoY.

• Well-managed duration of credit card program agreements: The program agreements with the 5 largest partners have expiration dates that range from 2030 to 2035. 22 of the 25 largest programs have expiration dates in 2027 and beyond. In the 9 months ended 3Q25, SYF added or renewed over 40 partners. This is part of the routine details provided as SYF makes ongoing announcements in press releases of their additions and renewals.

• Dual branded and co-branded cards: The dual/co-branded mix was 46% of total purchase volume in 3Q25 (+8% vs. last year). Consumer dual and co-branded cards were 31% of total loan receivables at 3Q25. Major product categories also include private label and general-purpose credit cards. SYF saw higher broad-based spending across these programs as well as the Synchrony-branded, general-purpose card. This color is consistent with some of the firm retail sales numbers seen in economic releases as 2025 proceeded, and the signs there signal a resilient consumer sector. SYF cited “continued points of strength coming from restaurants and electronics.”

• The platform mix cuts a wide path in retail and digital: We line the platforms up in descending order of receivables. Purchase volume, interest income and fees, and average receivables are detailed. Home & Auto is the only one with a significant decline in receivables but purchasing volume only saw a slight decline. Looking across the timeline, the Digital platform unsurprisingly shows healthy growth. Technology is an obvious catalyst for expansion. In 2024, 57% of applications were via online or mobile app channels (per SYF 10K). Meanwhile, 75% of credit card accounts with balances have activated digital servicing.

• “Income share” across the platforms mirrors receivables mix: The income share across FY 2024 was led by Digital (29% of FY 2024 interest and fees) and Home & Auto (27%), Diversified & Value (22%), Health and Wellness (17%), and Lifestyle (5%). Examples of major partners in Home & Autos are Lowe’s and PC Richard. For Digital, we see Amazon and Verizon and payment solution providers such as PayPal and Venmo. Diversified value examples are JCPenney and Sam’s Club. Lifestyle ties into a range of partners including Dick’s Sporting Goods, American Eagle, Guitar Center, Kawasaki, Suzuki among others.

• Wellness as a growth market: Health & Wellness includes a range of entities from health focused retailers (Walgreens) to health care providers and SYF’s own CareCredit brand. Health care is a natural target for growth given demographics and the basic reality that health care is around 18% of GDP. SYF’s “CareCredit program is a credit card designed to support your health and wellness wants and needs. It’s a way to pay for the out-of-pocket costs at over 285,000 locations nationwide including treatments, procedures and more…”

• The Ally business line acquisition broadened the mix: SYF acquired the Ally Financial point-of-sale financing business in a $2.0 billion cash deal. This acquisition and related mix flows into Home & Autos and Wellness. Growth business lines and specialty areas include roofing, HVAC, and windows, as well as in cosmetic, audiology, and dentistry. These were part of the rationale for the deal.

• The trends in asset quality have been favorable in credit cards: The moderately favorable trends in asset quality for SYF as of 3Q25 mirror the color from JP Morgan and BofA in their 3Q25 numbers. Cap One as a consumer finance and credit card giant also gave favorable asset quality results. The spend trends, payment rates, and asset quality performance is pushing back against the theme of a consumer in trouble. For SYF, that comes with the asterisk of a heavy base of prime quality borrowers and creditworthy households.

• SYF posted lower delinquency rates and lower charge-offs: The 3Q25, YTD and annual numbers are broken out in the chart, and delinquencies and charge-offs are ticking lower. Charge-offs during the reporting period were 5.16% in 3Q25 vs. 6.06% YTD and 6.31% in FY 2024. SYF offers supplemental disclosure with monthly numbers. The late months of 2024 wound down the monthly 30+ day delinquency rates in the high 4% range vs. the low 4% range or each month of 3Q25. Charge-offs in 3Q25 declined sequentially to 5.16% from 5.70% in 2Q25 and from 6.06% YoY from 3Q24. The charge-off rates by month in 3Q25 are in the low 5% range each month after 5.8% in June and a 6.3% in April and 6% handles for each month from Sept 2024 to April 2025. The trend is favorable across the quarters. Asset quality in 2025 is worse than 2021-2022, slightly worse than 2023, but modestly better than 2024.

• Credit scoring shows the focus on middle to upper tier consumers: SYF provides useful disclosure on its credit tier mix. SYF uses VantageScore credit data. Per SYF, the scores are set “at origination of the account and are refreshed, at a minimum quarterly, but could be as often as weekly, to assist in predicting customer behavior.” SYF categorizes these credit scores into the following three credit score buckets: (1) 651 or higher (73% of credit cards at 3Q25); (2) 591 to 650, “moderate” credit risk (19% of credit cards); and (3) 590 or less, “weaker” credits (8% at 3Q25).

• Buybacks dictate the capital allocation story: The cash flow chart above is mostly about tracking the rate of buybacks with the dividend rates tied to a combination of regulatory latitude and the steady decline in share count. The most recent quarter saw $971 million in buybacks in 3Q25 ($1.98 bn YTD). The board approved another $1 bn in buyback authorization for a total authorization of $2.1 bn.

• Excess capital comfort and solid profitability support buyback scenarios: The Tier 1 capital ratio at 3Q25 of 14.9% was up modestly from 2024. We look at the SYF capital history in the next chart. The buyback volume is reassuring equity investors while the asset quality and access to capital keeps credit markets happy and offers comfort around funding flexibility and reliability. The decline in dividends in total dollar terms across the cycle is consistent with the dramatic reduction of the share count since the pre-COVID period.

We include the above line items from the 3Q25 10Q and 10K for a convenient look at the actual vs. the minimum capital required. The company has plenty of capital, strong earnings, and a key stock market factor each quarter is the amount and timing of buybacks.

History and Highlights:

• Synchrony descends from the legacy consumer credit unit of GE: SYF was formerly GE Capital Retail Finance before its IPO in July 2014 and “split off” from GE In 2015 when GE exchanged its SYF shares for GE stock, leaving SYF as a stand-alone operation and constituent of the S&P 500. The GE unit was the largest provider of private label credit cards in the United States based on purchase volume and receivables. The spin/split off was part of an ongoing break-up of GE into more independent operations. That GE restructuring and business line exits have been ongoing across the decades and accelerated after the credit crisis.

• SYF purchased an Ally consumer lending business in 2024: Ally divested the point-of-sale financing business in March 2024 for $2.0 billion in cash. The deal bolstered SYF’s home improvement sector exposure (roofing, HVAC, windows, etc.) and its position in the health and wellness markets. The deal included the acquisition of $2.2 billion in receivables.

• SYF divested its Pets Best Insurance in March 2024: The deal was $1.1 bn in pretax gains and $802 million net of tax. The deal came alongside the acquisition of Ally’s consumer business. The realignment of the portfolio reflects the focus on building out the partner network while sustaining a strong capital base and thus buyback potential. SYF heads into 2026 with a strategy focusing on more growth based on what they laid out in the game plan for each platform. Digital and Wellness are key growth opportunities. Major wins such as getting Walmart back in the fold and targeting health care as a growth sector have seen favorable feedback in the equity markets. As detailed earlier, this is all part of the constructive story as reflected in the relative stock performance across numerous trailing periods into 2025.

• We look across the range of operating and financial variables at GM including the GM Financial unit, key model volumes, and the pension/OPEB exposure. GM is still holding steady at a BBB2 composite rating.

• The themes of a strong balance sheet, a liquidity hoard, very healthy cash flow, and an improving core performance in its increasingly US-centric operation and US-focused capex plan amount to good news in structural risks and operating prospects. GM Financial is a very strong performer while a much smaller GM International segment has a mixed history as China struggles.

• The partial offset to the favorable financial health story is that GM is now seeing weaker profits and narrower margins from tariffs. The execution risk in repositioning capacity within North America is a fact of life as GM seeks to get it done efficiently. The intrinsic consumer cyclical risks are running alongside the need to adapt to new tariff structures that are constantly changing.

• The shift in Washington policies on the ICE vs. EV trade-offs has been distinctly favorable for GM as the shelf life of its core products get extended. The emissions policies mitigate some of the other costs barraging GM in tariffs that flow into materials and supplier chains.

• GM happens to hold down the #2 position in EVs, and GM has experienced very favorable EV growth in 2025 YoY ahead of the new post-tax incentive world. Those favorable EV volumes will fade from here. Diminished customer appetites for EVs can be addressed by GM through more action in shifting its structural cost plan relative to original expectations.

Below we get into the weeds of the GM story, but the above stock chart indicates that GM has managed to somewhat delink from the legacy Detroit 3 peers (with Chrysler rolled up into Stellantis). We are in process on Ford and Stellantis reviews as well, but there is not much mystery to the fact that GM has held up better in a period of rapid change in the auto sector.

The timeline above for stock returns starts with the March 2022 tightening cycles. GM has materially outperformed Ford and Stellantis but underperformed the tech-heavy S&P 500.

CREDIT TREND: Stable

• ICE mix and GM performance trumps tariffs in GM credit story: The wave of tariffs and resulting supplier chain disruption threats to non-US assembly capacity in Mexico and Canada (notably Mexico for GM) tend to lead in the negative headlines, but the benefits of ICE leadership and GM’s light truck strengths allow the company to eat some tariffs while continuing to invest in the product plan and some core model success stories. That multiyear capex program includes material increases in US-based capacity, and that bodes well for healthier relations with Washington’s desire to dominate manufacturing investment plans. Trump and tariffs are a reality GM is dealing with. Lower earnings and margins are part of the adjustment stages.

• GM is a GMNA story now: GM is distinctly profitable in GMNA with the hemorrhaging Cruise segment now folded into GMNA. GM Financial is a clearly profitable and positive contributor from a P&L and strategic standpoint. The smaller GM International segment is a modest contributor and much smaller factor in the overall GM financial and operating profile than in past cycles. Exiting the EU was a long-term positive.

• Capex consistency and capacity shift underway: GM will be investing heavily in the US to expand production, and that does not bode well for Mexico operations and the USMCA auto ecosystem. GM clearly has the financial flexibility to fund such investment and can absorb any related restructuring charges from the actions. GM has already overhauled its global operations with its exit from the EU, so this is a process where GM has some history.

• Tariffs assure lower earnings and margins: GM believes they can offset 30% of the tariff expenses and will continue to work with their OEM Tier 1 and 2 suppliers to adjust to the new reality. The term “work with suppliers” from major OEMs is always ominous for the supplier chain since it entails sharing costs but also can provide incentives for suppliers to invest more in the US and keep the White House powers happy. The pressure on GM profit margins is evident already and will remain a challenge, but GM’s very healthy cash flow dovetails with a strong balance sheet and no shortage of financial flexibility.

The macro picture in total volumes

• Volumes drive unit costs: The constant risk factor for any major OEM is the intrinsic cyclicality of consumer durables broadly and autos specifically. The old rule of fixed costs and unit costs apply. Volume is in the denominator and high volumes can mask more than a few challenges. In GM’s case, the challenges are now lower than they would have been with Trump’s more ICE-friendly regulation playing to GM’s core strengths. Policy shifts improve GM’s ability to withstand the onslaught of tariffs. With the USMCA up for review by June 2026, that could matter even more later as GM scrambles to shift production capacity into the US with a capex program of almost $5 bn to get there over the next two years.

• LV SAAR histories show lower highs and one hopes higher lows: Running north of 16 mn SAAR quarterly are very healthy volumes. Cyclical risks are a fact of life, but a crisis like the 2008 meltdown and 2020 COVID pandemic changed the usual rules. The chart above tracks the Light Vehicle (“LV”) sales volumes on a quarterly SAAR average through 2Q25 numbers. We chose the quarterly average SAAR above to smooth out the highs and lows seen in monthly data with “retail specials.” The time series updates the history since 1979 – a year of high inflation when the table was being set for a Chrysler bailout under Carter (with legislation and Congress involved). Then came a double-dip recession and protracted bout of stagflation in 1980-1982. The new oil price backdrop in 1979 (Iran Oil Crisis) and rapidly shifting consumer preferences on the way into a recession are histories for another time.

• The current cycle is steady: We do not have the final 3Q25 LV data point yet from the Fed in the chart, but a strong summer sales season included a spike in EVs ahead of the end date for tax credits as of the end of September. As we go to print, Sept SAAR was cited around 16.4 mn. GM’s challenge is in addressing the tariff and de facto “relocation challenge” while adapting its EV mix to the new realities in a post-tax-credit world. GM also will be keeping a close eye on dealer needs to protect the connection to the consumer, and that has been the main motive behind “eating tariff costs.” In terms of the incentives to drive volume, GM has highlighted how their incentives relative to average transaction prices (“ATPs”) have been lower than the peer groups even while they are picking up market share.

• Capex will remain high regardless of the cycle: The priority for GM has been articulated routinely as they seek to keep structural costs in check and consistent with their margins and mix. The “lower highs” and higher lows” in SAAR seen in the recent cycle make for a less volatile volume story and hopefully will signal decent underlying demand in 2026-2027. The expectation of lower auto financing rates is swept up in the easing and UST curve slope debate.

OPERATING PROFILE

The multi-decade downsizing…

• GM has a long history of shrinking its footprint since the 40% market share days: We first started watching GM on the buyside in the early 1980s when it had a 40% handle market share in the US. That was numerous cycles, decades, and crises ago. The older guard will remember iconic names such as Pontiac and Oldsmobile among legacy brands that did not make it through the rounds of restructuring as GM saw its market share collapse over 50 years. Less iconic names such as Saturn did not last while Buick survived given its strong name recognition in China. GM is trying to rebuild that brand with a mix of China and South Korea produced models as well as a domestically produced model.

• Light trucks rule the story: Chevy and GMC trucks are the cornerstone of GM financial health, revenues, cash flow and dealer support. We look at higher volume models further below in the charts and commentary. Cadillac was a legacy luxury brand that faded against the non-US luxury offerings from Germany and Japan (Lexus) but Cadillac had recently been executing on an EV strategy. Cadillac’s winners in the mix are unsurprisingly tied to luxury SUVs.

• Footprint changes are not new but will now reverse: The industry evolved radically over the decades as transplants soared in manufacturing presence in the US (notably the Japan 3 and Korea 2) with luxury German nameplates among the transplants, who also reduce their political risk and currency mismatches as they built out extensive dealer and/or finance units in the US. The US OEMs had moved to low-cost global sourcing across the 1990s into the new millennium, but managing the supplier-to-OEM chain is now more complex than ever with the deluge of tariffs, the EV vs. ICE issues, and technology investment decisions (EVs, hybrids, AV plans etc.).

• GM as market share leader: With a 17% handle (17.2%) market share in 2025 YTD (9-30), GM remains the #1 seller of light vehicles in total for the US across its 4 major brands: Chevrolet, GMC, Cadillac, and Buick. GM ranks ahead of Toyota at #2 and Ford at #3. The good news for GM securities holders is that GM is very healthy financially, is picking up market share in 2025 from 16.5% in FY 2024. GM leads in full size pickups and full size SUVs. GM is adding US capacity in both those segments. GM just posted record sales of crossovers in 3Q25 as well with a +16% sales gain. We look at the broader mix of models further below.

• ICE vs. EV: GM boasts a very strong competitive position with its legacy ICE mix in light trucks (pickups, SUVs, crossovers), and ICE still dominates the market share mix at around 92% to 93% of US industry sales. That said, GM has moved into the #2 spot in EVs. With the revised regulatory climate under Trump, GM seeks to fashion the optimal cost structure and investment profile for an EV sector that is running well short of the original expectations under the Biden policies. The embrace of the term “natural demand” for EVs comes up a lot. It will now get put to the test.

• Political risk as a variable now runs alongside supplier chain challenges: Tariffs as a policy cannot be directly controlled by the OEMs, but they have the added risk of unpredictability. Even this past week, there was a lot of commentary that tariff pressures and supplier chain risks will get some relief for those assembling here. There were no details. Supplier chain financial stress risk is not a new feature, but the underlying causes are different now.

FINANCIAL TRENDS

• Exceptional asset protection and liquidity: The scale of GM’s asset base, the massive run rates on automotive EBIT even with the tariff cost pressure, the reality of automotive cash in excess of debt, the steady and reliable earnings and dividend flows from GM Financial with its strong asset quality are major positive factors. A detailed and manageable product cycle plan and notably over 2026-2027 makes a very strong case for credit quality and cash flow predictability. The 2028 variables will include major questions of who runs in the election and what their tariff views will be given the recent process of all tariff policies emanating from the White House (not Congress).

• Model cycles and cyclical uncertainty are built into expectations: Model cycles ending or fading still make for a steady overall financial profile at GM. The well-established ICE product strengths of GM are undeniable and notably in light trucks. GM has sustained a lead in numerous product segments, and the competition has not been able to crack such anchors as large pickups and large SUVs. The “labor arb” factor in pricing vehicles is being worked out of the system. There are some segments where GM and Ford both have faded (luxury vehicles and cars generally). GM’s performance in EVs was impressive in its product dexterity and allows for some optimism around its efforts to tackle new technologies such as AVs. On the other hand, the Cruise segment was a flop and was folded into GMNA.

• Legacy liabilities (Pensions and OPEB) are very manageable: We address the pension and OPEB legacy liabilities and funding process further below, but the new GM created separately from the Chapter 11 entity is a very different beast than the pre-2009 version. We see salaried defined pension plans frozen (no more accruals, shift to defined contribution) and the hourly worker defined benefit plan closed (no new members). The recurring funding needs are disclosed and manageable. The funding and cash flow demands will gradually wind down with the forces of nature and the actuarial tables (“death and taxes,” etc.).

OPERATING RESULTS

• 2025 profit trends are tailing off: The above table highlights the headline numbers with revenue and operating income declining in 2Q25 YoY and 1H25 YoY after a solid stretch from 2022 to 2024 despite higher interest rates, higher prices, and diminished affordability. Much is going right for GM with Average Transaction Prices (“ATPs”) of more than $51K in 1Q25 and 1H25 vs. $50K in FY 2024. GM outperformed the industry in growth. GM is #2 in EV sales across a range of product segments and price tiers with a game plan to stay in the EV battle with a right-sized and diverse mix.

• Consolidated EBIT margin compression: We look at the segment history below, but the adjusted EBIT margin declined to 6.4% in 2Q25 from 9.3% in 2Q24 after 1Q25 posted a decline to 7.9% from 9.0%. The FY 2024 EBIT margin was +8.0%, which rose from 7.2% in FY 2023. The tariffs are having a logical negative effect in 2025 which will continue into 2026.

• Guidance calls for lower margins on tariffs and volume: The new FY 2025 guidance range with 2Q25 numbers calls for adjusted EBIT is $10.0 to $12.5 bn ($11.25 bn mid). Free cash flow guidance is in the $7.5 bn to $10.0 bn range with $10.0 to $11.0 billion in capex plans including the battery JV. That is a healthy forecast considering the tariff headwinds, but the forecasted results are well down from the $13.7 bn to $15.7 billion estimate for 2025 that was presented with 4Q24 earnings. Tariffs have made a big and negative difference, but the Trump policies on ICE has supported GM’s core strengths.

• Segment guidance is solid: With the latest FY 2025 guidance after 2Q25, GMNA pricing was expected to be slightly higher, GMI “ex-China” will be “similar to 2024,” and GM Financial EBT is guided to the $2.5 to $3.0 billion range.

• Tariff costs are expected to be in the $4 bn to $5 bn range: The company expects to recover 30% of tariff costs with the remainder a mixed picture subject to other cost mitigation actions, supplier chain discussions, and uncertainty around the trade partner “deals” being finalized and related contingent risk scenarios that would come with those deals breaking down.

SEGMENT RESULTS

• GMNA 2Q25 EBIT weaker, margins softer: There is no hiding from the tariff expense with higher tariff costs than in 1H25 assured in 2H25. GMNA EBIT margins at 6.1% in 2Q25 vs. 10.9% in 2Q24 tell a clear story on the trend. Painful tariffs are now a fact of life that encourage relocation of production and a focus on supplier chains. GM believes it can offset 30% of the total tariff cost in 2025. Average transaction prices at $51K included lower incentives as a % of ATP with 2Q25 2 points below the industry average. Picking up market share (to 17.4% in 2Q25) with volumes higher and pricing favorable was the 2Q25 takeaway.

• Favorable GMNA volume trends: We see GM posting favorable variances in 2025 with volume higher across all brands with 2Q25 retail sales at +10% and 1H25 retail sales at +12%. GM was the leader in truck sales again with record crossover sales at +16% in 2Q25 and +23% in 1H25. EV sales share hit +15.8% in 2Q25 after +10.4% in 1Q25 – both substantially higher YoY. Chevy ranked #2 in EV sales and Cadillac #5 in total EV volumes. The recent 3Q25 sales volumes released last week were also quite solid. GM US deliveries were reported at +7.7% for 3Q25 and 3Q25 YTD at +10.3%. Chevrolet was +8.3% for 3Q25 and +9.0% for 3Q25 YTD volumes. GMC was +8.6% for 3Q25 and +10.3% YTD. Chevrolet and GMC are the two major brands, accounting for almost 88% of GM 3Q25 volumes. Cadillac rose by 25% in 3Q25 and 19.4% 3Q25 YTD. Overall, GM posted its best market share since 2017 in 3Q25 and the best YTD market share since 2015.

• GM International Operations (“GMI”): International trends have changed dramatically over the past decade with the exit from EU and numerous regions. From here, GMI will be mostly about China sales and JV activity. GM has material market share in Brazil (10.0% in 1H25, down from 12.3% in 1H24). China share was flat YoY at 7.2% in 1H25 (7.1% 1H24). China has been a challenge for GM given competitive conditions and market struggles detailed in the 10-K. GM’s China JV generated $4.4 billion equity losses in 2024 which included restructuring charges of $2.1 billion for impairment of the equity interests and another $2.0 bn for implementation of the restructuring plan. Back when GM’s IPO was leading to a lot of outsized sum-of-the-parts valuation by the street, China was assigned values at a very high multiple that helped pad the target price. Those days are over – at least for the foreseeable future.

• GMI looks very different than a decade ago: As discussed earlier, GM’s history as one of the European Big 6 is a distant memory as are the GM-owned Opel and Vauxhall brands that were sold to PSA and now roll up into Stellantis. GM also has downsized and discontinued much of its Southeast Asia based operations, wound down Holden in Aus/NZ operations, and exited India.

• GM Financial (“GMF”): GM has built up a very solidly profitable and captive unit as the company looked to rebuild something like the “old GMAC.” The acquisition of AmeriCredit in 2010 set GM on the course of rebuilding the finance unit (see History and Highlights further below). GMF now has a much larger earning asset base with favorable asset quality metrics as detailed below. For some context on the rate of growth since restarting its captive finance rebuilding, GMF has grown from $9.2 billion in net receivables in 2011 to almost $92 bn at 2Q25 (excludes leasing assets).

• Cruise folded into GMNA for 2025: For segment reporting, we include some of the old disclosure above that includes Cruise, which has now been folded into the GM North America segment (“GMNA”). GM changed its strategies around Cruise from an AV Robotaxi effort to an AV project for personal vehicles. The rationale was that robotaxi initiatives would be too capex intensive and undermine capital efficiency. The theory is the integration with the GM Super Cruise technology investments and ADAS could generate synergies with the AV effort (assisted driving tech meets autonomous). As evident in the segment results above, Cruise was a massive headwind for earnings, and the decision to exit is a net positive for earnings, cash flow, and capital efficiency.

CASH FLOW LINES

• Meeting the capex demands: The key cash flow lines above highlight the cash flow strengths of GM as the company maintains a higher rate of capex to meet product initiatives and the plan to expand US capacity. The US capex plan includes a priority of bringing back light truck, SUV, and crossover capacity to the US and scaling back in Mexico and Canada. The 2026 review of the USMCA will keep those stakes high.

• Capital allocation: The ability to return cash to shareholders has been reiterated, and the number above highlights that buyback numbers can swing dramatically subject to operating results and core business priorities. GM’s CFO indicated in a recent presentation that GM had bought back 30% of shares outstanding over the past 3 years.

• GM Financial dividends: The chart above highlights the steady upstreaming of dividends from GM Financial of just under $2 bn each year since 2022. That is a healthy add-on to the free cash flow generation from the core auto manufacturing operations.

AUTOMOTIVE CASH AND DEBT

• Cash flow and liquidity resilience is clear in recent history: The above table highlights the impressive base of cash flow and balance sheet liquidity with automotive cash in excess of automotive debt. The ability of GM to manage its liquidity is evident in the table above across a timeline that includes a pandemic, an inflation spike and tightening cycle, massive capex, and cumulative stock buybacks of almost $23 billion from 2022 to 1H25.

GM: Pension and OPEB

• Pension and OPEB quite manageable in the context of funding needs: The above chart details the underfunded position of GM in defined benefit (“DB”) pension and other postemployment benefits (“OPEB”). Pensions and OPEB have always been contentious topics with the UAW and a financial headwind in “old GM” before the 2009 bankruptcy and creation of a separate “new GM.” The Section 363 sale to the new entity included the transfer of pensions and OPEB to the new GM. OPEB is overwhelmingly about health care.

• The DB US hourly plan is the main event: The US DB plan obligation is 3.5x the remaining non-US projected benefit obligation, and US plan assets were around 4x the non-US plan asset level. ERISA rules are much more onerous, and there is always the chance the UAW will seek to open those plans again. The US DB hourly plan covers employees hired prior to October 2007 and for Canadians hired before Oct 2016. Salaried plans have shifted to defined contribution, and many salaried DB obligations were offloaded in pension risk transfer transactions (purchase of annuities). The salaried plan is “frozen” (no more accruals) while the hourly plan is “closed” (no new additions). Hourly workers will keep trying to restore DB benefits in future contract rounds, but GM will say “no” or pay a price in the market and in competitive costs. GM got past the latest round by increasing payments to retirees and eligible retirees and active plan members.

• GM Non-US DB obligations include legacy Opel and Vauxhall: Part of the cost of the EU exit by GM included taking on most of the legacy pension obligations. The legacy liabilities will remain a drag on the adjusted balance sheet. We do not consider the overall pension exposure in the US or non-US side as major risks at this point. Those liabilities can be managed with steady contributions and decent asset returns, but the natural actuarial course of life expectancy will gradually run down the pension obligations.

• OPEB is contract risk, pensions are debt risk: We have often written about pensions and OPEB over the years after years of covering the autos and airlines (always an adventure) and the color to assign is “grey” on the debt-like vs. contract-like nature of DB plans vs. OPEB. There has been no shortage of bankruptcies that offer up a lot of data points. A simplistic generalization in many of the bankruptcies across the cycles is that pension plans and health care plans get rolled into the post-emerged entity with salaried plans much more vulnerable to a freeze (pensions) or elimination (OPEB).

  The wide array of legal issues needs to be looked at on a case-by-case basis with collective bargaining agreements having a bigger seat at the table. That is separate from the Section 1113 provisions in collective bargaining Section 1114 on retiree benefits. That is a broader topic for another day, but those are rarely triggered given the scale of damage they do to the estate and going concern potential. That is especially when the unionized hourly workers could react with crippling strikes.

  Historically, recovery rate estimates often get manipulated by the “axed” who inflate the haircut on unsecured debt tied to pensions and OPEB. ERISA statutory clout is a major overriding factor. The battle around how to treat pensions and OPEB in recovery estimates is an old debate and the same with how to frame it in valuation metrics (see bullet below). When the US OEMs were in serious trouble, the claims risk handicapping was part of the exercise.

• Pension plan “drain rates”: The above chart breaks out the usual metrics on obligations, assets and returns, but we also like to look at the benefit payout rate. We sometimes call it the portfolio drain rate (“benefit payments % plan assets”) since that bill is due each year to retirees. That cash drain rate must factor into asset allocation decisions (debt vs. equities, coupon income, etc.) and need to be prudently managed. The obligation math and actuarial science (arts?) of course matter, but “cash in, cash out” is more intuitive. An easier and more objective and assumption free question answers this question “What was my actual return last year vs. what I paid out in benefits?” Given the maturity of the pension plans and retiree base for a company such as GM, credit allocations have been very attractive with a higher coupon serving as a helpful offset.

• Funding demands are the main topic whether mandatory or discretionary: For 2024, GM’s US DB plan paid out around 9.8% (benefit payment % beginning plan assets) after 9.3% in 2023. We see 7% handles across 2020-2022. That is a big cash payout each year. If we look back over the past 5 years for the US plans, we only see 1 year (2020) when returns exceed payout rates. That is where additional contributions can come in. For the US plan over the past 3 years, the contributions to the US plan were $526 million (2024), $357 mn (2023) and $71 mn (2022). The contribution for 2025 is expected to be “insignificant.” For non-US plans, the contributions were $653 mn (2024), $395 mn (2023) and $332 mn (2022). Non-US plan contributions are expected to be up to $125 million in 2025.

• Pensions and OPEB in valuation: The use of EBITDA vs. EBITDAP or EBITDAPO in EV math and adjusted EV multiples get tossed around a lot but in the end most analysis reverts back to EV/EBITDA and P/E multiples. With so many wild rides across the cycles and major automotive sector stress and bankruptcies, most of the scenarios have been tested.

  Adjusted EV multiples can occasionally make a material difference across industry peers such as when Delphi was emerging from Chapter 11 “pension free” and was going to be valued in the context of numerous suppliers with pension and OPEB exposure. Delphi was a unique story as it got swept up in the GM obligations and bailout working with the UAW and a very UAW friendly group of bailout architects.

• Don’t let the GAAP accounting get you down: The assumption-driven accounting for legacy benefits and the related lingo and nuances of ERISA vs. GAAP can seem daunting. The assumed plan asset returns (essentially a contra-expense line in GAAP pension expense) gets into quality of earnings questions (do they inflate expected returns relative to the asset allocation mix?). The changes in how discount rates are applied for obligation math (ERISA or GAAP) are important in the “objective” measurement process, but ERISA always trumps GAAP. The GAAP math can be a distraction at times, and that was especially the case across the ZIRP years when ERISA-based measurement and legislative relief on discount rates was the main event (relief which they in fact routinely received).

  A good working assumption is that minimum funding requirements can swing across the cycles with ERISA rules as the main focus that flows into statutory minimum funding requirements and cash flow demands. Discourse disclosure has improved over the years.

GM FINANCIAL: BALANCE SHEET HIGHLIGHTS

• Slow and steady growth in the GMF asset base: As noted earlier, a 10-fold increase in net finance receivables since the acquisition of AmeriCredit (see History and Highlights below) and growth in the recurring customer base is the bulk of the GMF story. GMF brings both strategic value in the core GMNA operations and is very supportive of retail customers and dealers. We covered the segment earnings story earlier.

• Impressive profitability, high quality and liquid assets: The dividend flow upstream to the parent leaves GM well positioned to deal with a range of potential cyclical outcomes. We look at the asset quality in the next table, and the liquid nature of the assets (securitization, liquidation) as demonstrated across an unusual cycle (i.e. a pandemic, inflation spike, tightening cycle, and affordability challenges).

• Support Agreement- Leverage Ratio: GMF’s support agreements and leverage requirements are broken out on the 10-K. “Our earning assets leverage ratio, calculated in accordance with the terms of the support agreement with GM (the Support Agreement), was 9.24x and 8.32x at December 31, 2024 and 2023, and the applicable leverage ratio threshold was 12.00x. In determining our earning assets leverage ratio (net earning assets divided by adjusted equity) under the Support Agreement, net earning assets means our finance receivables, net, plus leased vehicles, net, and adjusted equity means our equity, net of goodwill and inclusive of outstanding junior subordinated debt, as each may be adjusted for derivative accounting.”

• Support agreement with GM: GMF is a critical unit in the GM family given its importance to dealers and customers. The support agreement is strong one as detailed in the 10-K: “… If our earning assets leverage ratio at the end of any calendar quarter exceeds the applicable threshold set in the Support Agreement, we may require GM to provide funding sufficient to bring our earning assets leverage ratio within the applicable threshold. In determining our earning assets leverage ratio (net earning assets divided by adjusted equity) under the Support Agreement, net earning assets means our finance receivables, net, plus leased vehicles, net, and adjusted equity means our equity, net of goodwill and inclusive of outstanding junior subordinated debt, as each may be adjusted for derivative accounting.”

  “Additionally, the Support Agreement provides that GM will own all of our outstanding voting shares as long as we have any unsecured debt securities outstanding. GM also agrees to certain provisions in the Support Agreement intended to ensure we maintain adequate access to liquidity. Pursuant to these provisions, GM provides us with a $1.0 billion junior subordinated unsecured intercompany revolving credit facility, and GM will use commercially reasonable efforts to ensure that we will continue to be designated as a subsidiary borrower under GM’s corporate revolving credit facilities.”

GM FINANCIAL ASSET QUALITY

• Growth in earning asset base: Steady growth in receivables across retail customers and dealers is a good sign. Monitoring reserve adequacy, delinquencies, and charge-offs is a standard process each quarter. Leasing exposure is material and watching residual value trends in the used vehicle market is a core part of framing asset risks and “repossession losses.” The next stage of dealer needs around used vehicles and EV residuals will get more focus in the quarters ahead as the tax credits have ended and the natural demand for EVs become a hot topic.

• Allowance comfortably above net charge-off: The allowance cushion in the table remains at a multiple of charge-offs with plenty of cushion for setbacks in the event of an adverse turn in the cycle and employment weakness. The market is increasingly focused on a more sustained erosion of auto retail receivables credit quality with payrolls softening and pressure on a major subset of the consumer spectrum. Health care cost shocks and less friendly mortgage rates north of 6% won’t help the trends in consumer credit and monthly payment burdens.

• Growth in “prime” receivables share by GMF over the cycle: The quality of customer credit has risen since 2020 with the prime FICO share (680 or higher) up to 76% at 2Q25 vs. 64% in 2020. The near-prime mix is 12% (620 to 679) at 2Q25 vs. 15.4% in 2020 while subprime (less than 620) is down to 12.0% in 2Q25 vs. almost 21% in 2020.

GM: RETAIL SALES VOLUMES

• GM is about light trucks: The above chart breaks out the GM mix and volume trends for 2Q25 and 1H25 vs. the prior year (source: Automotive News). The categorization of light trucks includes pickups, SUVs, and crossovers, so the small slice of “cars” is now more one of convention (and some regulatory and trade nuances) than one of utility when they are all overwhelmingly passenger and/or fleet vehicles with some blurring into commercial use in the larger pickup categories. We use the 2Q25 numbers above to match up with the fiscal reporting periods in hand so far. GM 3Q25 earnings will be released later this month (10-21-25). We will update the 3Q25 data at that time. We update 3Q25 volumes below.

• Results are about volume, price, and mix: GM delivers an exceptional amount of detail in its quarterly reports and related slides. For those new to tracking autos, we recommend Auto News for an industry practitioners’ perspective without the “EPS spin.” Reading the Detroit News that posts auto coverage every day is also helpful. The Cox Automotive products are excellent for data and trends. These people eat, drink, and sleep autos. The details on EVs and dealer trends are especially helpful, and there is no shortage of information in what Auto News provides including extensive sales and production stats each month with an array of content and data offerings.

• 3Q25 keeps posting strong growth: GM released 3Q25 and YTD 3Q25 volumes in the middle of last week (10-1-25). Volumes remained quite strong in 3Q25 with GM holding down its market share lead with “ICE market share” at 17.4%. GM’s 3Q25 unit sale posted +7.7% in US vehicle sales and weighed in at +10.3% YTD. The calendar YTD share of 17.2% was cited as the best since 2015.

  The favorable volume variance again has GM outperforming the large OEM peer group. Chevrolet was +8.3% in 3Q25 and +9.0% YTD. Cadillac was +25.0% in 3Q25 on the back of good EV results from new luxury EVs. Those increases come with the asterisk of a banner period for EV’s looking to get in under the wire on the expiration of the $7500 tax credit. GMC is the second largest GM brand well ahead of Cadillac and Buick , and GMC posted +8.6% units in 3Q25 and +10.3% YTD.

• GM picking up market share with its strong position in light trucks and ICE: GM will spend $4 bn to $5 bn on expanding US capacity over the next two years. The mix of products underscores the benefits of easing emission standards and major cost savings on the rate of “buying credits” to mitigate the heavy fleet mix of light trucks (notably large pickups and large SUVs).

• GM has climbed to #2 in EV share and posted records in 2025: GM’s bragging rights is that it is #2 in EVs as a way of showing its commitment to the space with its 12 EV models. Chevrolet is the #2 EV brand and Cadillac is the #5 EV brand. GM wants also to show that it hits what it aims at these days in product planning. No company was more active in making its case for traditional ICE vehicles and challenging emissions rules than GM, but it also can make a claim that it shifted with the rules and was executing in its EV product program.

• ICE now trumps EV planning for GM: Cadillac and Buick were both targeted to be 100% EV by 2030. That is not happening. EVs are only 7% to 8% of the market, so the main event – notably for GM – is still all about ICE. On that score, Trump has been helpful to GM by lowering barriers to growing and sustaining GM’s very successful ICE business.

• “Executing” in EVs still meant losing money: Expending capital in a space where demand was well short of the regulatory ambitions has changed planning. GM has stated that the company will scale the EV operations to better match up with natural consumer demand. With respect to EVs, GM stated after 1Q25 that “50% of our entries were variable profit positive.” In a high-fixed-cost business, that only gets you so far, but with so many OEMs suspending, downsizing, or canceling EV plans for different models, the GM planning at least hedges EV bets and political risks in future elections. The new low-cost Bolt EV will be out later this year as a 2026 model, and that will be an affordable model that would “barbell” the mix with the Cadillac planning.

• The relocation and sourcing challenge: The shifts across product and model line items in sales and production (and where the production takes place) will get very interesting from here with the capacity relocation planning and the mix of import changes for GM (from Mexico, Canada, South Korea and China). The tariff terms keep on shifting with more potential changes underway including more supplier chain and OEM tariff changes being floated the past week (not specific yet). Autos are one of the biggest end markets for semiconductors, so there is plenty of drama ahead along the electronics chain. The USMCA is also up for review by June 2026, and it is hard to use rational economics as a guide for what will unfold. That negotiation could bring fresh uncertainty and even potential termination.

GM: KEY MODELS CHEVROLET AND GMC TRUCKS

• Trucks rule with pickups, SUVs, and crossovers: The lead themes around GM’s operating strategy on the product side as we wind down 2025 is to leverage the exceptionally strong ICE operations. The volume variances above tell a favorable story for GM through 2Q25. That continued into 3Q25, but we will break out those 3Q25 model details later. We summarized the latest 3Q25 volume trends above. These light truck models above have benefitted from the Trump policy of dialing back EVs and emissions and fleet rules and clearly extending the life of the most profitable and successful GM ICE platforms and model segments.

• GM is the leader of the legacy ICE carmakers (i.e. ex-Tesla) in EV share: GM has an EV strategy to target a low-cost EV with a Bolt redesign while also tapping luxury EV demand through its Cadillac brand. Cadillac has struggled against the Germans and Lexus in ICE vehicles, so the luxury EV plan has resonated. “Caddy” EVs could offer viable alternatives to the growing ranks of Musk haters. That strategy calls for GM to be well positioned in EVs at the right mix and cost structure. EVs remain unprofitable after fully allocated costs. GM tells a good story about balancing future ICE and EV volumes (and hybrids) and investing in manufacturing flexibility to produce ICE or EV at some of the same plants.

GM: KEY MODELS: BUICK, CADILLAC, CHEVROLET CARS

• Buick, Cadillac, and Chevrolet Cars still in the game: GM earnings and cash flow are tied to GM showing so much success in pickups, SUVs and crossovers, so it is sometimes easy to forget the models that are categorized as “cars” in the trade literature. The luxury Cadillac brand has strengths in luxury SUVs and EVs while the handful of Chevrolet cars are also detailed in the table with venerable names such as Camaro and Corvette. The Camaro has been discontinued while the Corvette is slated for a redesign in 2029. The Chevy Bolt is expected to be a high volume replacement for the Malibu as it also tackles the lower price EV segment.

• Cadillac remains a work in process: The Cadillac brand had struggled over the years against the luxury powerhouses of BMW, Mercedes, Lexus, and Audi having so much success over the cycles (some more than others). The Escalade at GM is part of its large SUV domination while the LYRIQ is a luxury SUV EV. The XT5 is a luxury SUV that was going to “go away” in the shift to all EV, but that plan is under review with EV vs. ICE decisions. The Cadillac XT4, which is a luxury subcompact crossover, is being phased out to make room for production of the Bolt at the Fairfax Kansas plant. The Malibu was also phased out already with the Bolt in theory set to fill in the void.

• The “other” vehicle lines: The above table updates some recent volume trends across models under the Buick, Cadillac and Chevrolet brands with Cadillac tackling EVs and Buick facing high tariffs for its subset of Asian-produced vehicle lines. The overall mix is going through a material amount of change since this past cycle as select models age, get phased out, or prepare for redesigns and final decisions on ICE vs. EV mix in the overall portfolio. The legacy Malibu line (midsize sedan) has been discontinued after a long run for that name (decades) in the latest sign of the death of the ICE sedan.

• Buick a challenge: With models produced across 3 countries (South Korea, China, and the US), Buick has its work cut out for it in US end markets. The Enclave is the only US made product with the Encore in South Korea, the Envista in South Korea, and the Envision in China. For 3Q25, the Buick models saw a -14.0% decline but with a +14.3% YTD increase. The big increase in 3Q25 was the US-made Enclave with major declines in 3Q25 for the Korean-made Encore (-38% 3Q25) and the China-made Envision (-35% 3Q25).

History and Highlights:

• Old GM vs. New GM: The current General Motors is a corporate entity that was created in 2009 out the rather convoluted Chapter 11 process and complex restructuring (Chapter 11 to Section 363 sale, etc.). The legacy GM went into liquidation under the name Motors Liquidation. That process is a long and tortuous story and includes the bailout politics and economics. The substance of the “new GM” creation is that the assets and many liabilities moved over to the new GM (contractual relationships, collective barging agreements, pensions, OPEB, etc.). Even the NOLs were moved over by separate legislative action. Then the New GM moved on from the crisis and put the longest recession in the postwar history in the rear-view mirror.

• The “New GM” did an IPO in Nov 2010: The transaction generated around $18 billion in common and $5 billion in preferred. The US Treasury received around $13.5 billion from the IPO. The government of Canada and Ontario and the UAW retiree health care trust also sold shares.

• GM separates supplier operations to lower fixed costs: Among the numerous adventures in restructuring GM’s fixed cost base in past cycles was the spinoff of the massive Delphi component operations into a separate entity in 1999. The Delphi history is a long story, but Delphi filed Chapter 11 in October 2005 and was mired in a protracted bankruptcy that was swept up in the auto crisis including GM’s Chapter 11. Delphi has given rise to multiple supplier entities since then (a story for another day). Ford went through a similar process with the spin-off of its supplier chain operations under the name Visteon, which was soon bailed out by Ford on the way to Chapter 11 for Visteon in May 2009.

• GM exits Europe: Among the most notable operating changes since 2009 was the radical downsizing of GM’s international operations and exit from Europe with the sale of Opel and Vauxhall to PSA in 2017. That was on the path to PSA becoming Stellantis in the PSA merger with Fiat, who for its part had taken over Chrysler in a complex set of transactions (Section 363 sale, etc.) in the Chrysler Chapter 11 of 2009.

• GM and Ford nonfactors in the EU: The consolidation of mass volume producers in Europe saw US operators dramatically downsized with Ford a shadow of its past with a 3% handle market share in 2024. GM’s exit from the EU over the recent cycles is a positive factor in its credit quality, capital efficiency, and strategic focus.

• GM creates a new captive finance company: Another radical change in the GM mix from its distressed and Chapter 11 years was the separation of GMAC from the auto company in a series of transactions that ended with the GMAC-to-Ally separated. For GM, the next stage of recovery was the buildout of a new captive finance capability in what today is General Motors Financial (“GMF”). GMF has grown since the acquisition of AmeriCredit announced in 2010 for $3.5 billion. AmeriCredit was a finance operator with a strategic focus on nonprime and subprime, but GMF has grown dramatically since then and morphed into a full-service captive finance operator with strong asset quality and steady growth (detailed above).

• The painful equity performance of Hertz since its emergence from Chapter 11 and making a big bet on EVs has haunted the company in both the debt and equity markets. The recapitalization and private equity derisking came first, and then the company looked for a touchdown with Tom Brady in EVs. The company is still digging out of its latest hole and is looking for almost a $2 bn swing in LTM EBITDA by 2027.

• Hertz now needs to bolster confidence that it can get back above $1 bn in EBITDA to sustain a viable equity market cap with too much secured debt and little financial flexibility as the current reality. The peak travel season of summer is crucial for car rental operators on the EBITDA line, and 2025 will not be bringing relief based on current guidance.

• The encumbered, layered and stretched balance sheet remains the second biggest problem behind operating losses. Hertz continues to address their cost structure and strategic game plan for the fleet. The history is not a good one on fleet planning when they deviate from the norm as they tried one too many times in the timeline from 2015 to 2024.

As we covered in the recent Avis commentary (see Avis Update: Peak Travel Season is Here 8-27-25), the period after COVID was quite volatile in the used car market, and that drove car rental margins to record levels as used vehicle inflation radically reduced unit costs for Avis and Hertz. The car rental profit windfall from used car valuations also drove a major increase in shareholder enhancement actions that were dominated by stock buybacks. Debt reduction was not a priority but reduced structural subordination was a priority for Avis.

The trend line for Hertz in the above stock chart is glaring enough. As HTZ plunged with its massive EV fleet problems and they endured a fleet cost spike, the challenge of excessive debt got much worse. Avis also showed high volatility during that wild period of dazzling EBITDA margins but had a rough run in 2024 until the big rebound in 2025. The result has been that some equity investors looking for a play on the high free cash flow car rental business would rather look to Avis on the basis of much greater financial flexibility and better financial risk symmetry to deal with any unexpected developments.

The above table opens up a wider range of comps for the car rental companies given the oligopolistic nature of the industry (with private Enterprise as the third player and by far #1 rental operation). The group above includes plays on travel via hotel and lodging (Marriott) and airlines (Delta and Southwest), on mobility (Uber), and on used cars (Carvana).

We frame the group against the S&P 500. Looking back to the longest time horizon (the emergence of Hertz from Chapter 11), the contrast between Avis and Hertz is a stark one with Avis +107% and Hert at -79%. Avis materially outperformed the S&P 500 as did Marriott and Uber.

We detail the consolidated results above for Hertz, and the EBITDA and EBITDA margin lines tell quite a story from the boom of 2021-2022 into the deep plunge of 2024 and a negative EBITDA of -$1.5 bn. The negative EBITDA line of 1H25 and 1H24 at least saw the positive line crossed (barely) in 2Q25. A notable backdrop for the travel-sensitive Hertz is the strong airport travel volumes (notably in 2023-2024) and decent travel period so far in 2025 that ran alongside the deep Hertz losses in 2024 and 1H25. That came after material margin erosion in 2023 while airport volumes and leisure travel soared.

The above chart frames the Americas RAC segment numbers. Americas RAC was where the most extreme volatility in the numbers can be found since that is where the fleet risks tied to residuals are concentrated along with around 80% of the global fleet (2Q25). We see the dramatic improvement in Adjusted EBITDA YoY in the Americas for 2Q25 and 1H25, but there is a long way to go to get a total Hertz EBITDA run rate above $1 bn for Global RAC.

The segment fleet size was lower YoY in 2Q25 and 1H25, but utilization has improved. Management cited a fleet age that showed 80% under 1 year. Market pricing was “challenged” (RPU), and HTZ still has a target of $1500 per month. Costs at $248 per unit was a solid improvement and inside the Hertz “North Star” target of $300.

The fleet replacement cycle and OEM negotiations are complicated by uncertain tariff risk and how materials costs (steel, aluminum, copper, textiles/upholstery, etc.) will flow into OEM fleet pricing strategies. The need to protect retail customers and key franchise dealers may not extend as generously to car rental customers.

While resilient used car prices usually are associated with higher new car prices, the reality of the new vehicle replacement costs brings a challenge to car rental in 2026 and 2027 given what is unfolding under Section 232 for autos and metals. That headwind will be there regardless of the outcome of the recent IEEPA legal challenge. The SCOTUS decision on the “reciprocal” and “emergency” tariffs are to be resolved in coming weeks (mid-Oct) after the Appeals Court ruled against the emergency Trump tariffs.

The above chart highlights the weak numbers in the International RAC operations but at least we see profits. The higher base of program cars reduces a major piece of the puzzle seen in the Americas.

The above chart highlights the “Depreciation per unit per month” (“DPU”) timeline across the recent cycles starting in 2015. The most striking numbers in the chart can be found in the benefits provided by the spike in used car prices with the supply-demand imbalance for used cars narrowly and vehicles broadly after COVID and semiconductors. The size of the bars in 2021-2022 and where they migrated into 2024 is an obviously negative visual capturing the financial performance of Hertz in 2024.

Managing residual value risk and building a core strength in used car remarketing has been a multi-cycle challenge in a world where technology is revolutionizing used cars sales. That is true for the dedicated used car players (Carvana, CarMax) and the leading franchise retailers (e.g. Lithia, AutoNation, etc.).

Hertz has tried to highlight how far it has come in used vehicle retail, and the recent Hertz-Amazon headline is the latest move. In the bigger context of financial risk and earnings, it is more about Hertz having a better read on forward residual risks and car rental pricing strategies to improve their ability to recover fleet costs.

Those 2Q21 to 2Q22 numbers drove record margins for Americas RAC segment including 34% in 2Q21, 39% in 3Q21, 32% in 4Q21, 34% in 1Q22, 33% in 2Q22, and 25% in 3Q22. That level of profitability fueled cash flow and EBITDA increases that sent debt/EBITDA metrics well below 1.0x in 2021-2022.

As the DPU chart drives home, that unit cost advantage reversed with a vengeance into 2023-2024 as EBITDA spiraled into the negative zone in late 2023 and into 2024. Peak travel period margins started to get cut in half in 2023 and then the serious loss period started.

Even operating in a normal environment was a struggle for Hertz in framing residual risks. Looking back, the period of 2016-2017 was a very rough one for Hertz in fleet residual risk as Hertz completely mismanaged investor guidance on vehicle depreciation (a de facto cash expense line in car rental and EBITDA definition) before blindsiding them in 3Q16.

Investors went into that late 2016 period armed with bad information. The DPU numbers back in the pre-COVID period seem low in today’s context, but vehicles were also much cheaper then and there was less to recover.

Those pre-COVID years are not very important now, but they were a part of a history that has led to so much turnover and different leaders at Hertz. The chaos from there across 2016-2017 led to damaged credibility in the credit and equity markets until COVID erased it all and sent Hertz into Chapter 11. Many of the strategic priorities and new Hertz speech content on how they fix the company sounds very familiar across time.

The above table captures the high-level balance sheet lines across total assets, revenue earning vehicles and the cash level with unrestricted cash low in historical context. The negative (-838 mn) EBITDA LTM is a long way from the $1 bn EBITDA targeted by 2027.

Unless Hertz starts reducing debt, EBITDA levels above $1 bn will be needed to have a viable balance sheet. That is certainly the case in the context of expected EV multiples (7x? 8x for a healthy Hertz?) and even justifying meaningful equity value commensurate with current levels (market cap $1.75 bn for Hertz, $5.7 bn for Avis).

For FY 2025, HTZ management cited the expectation of a slight negative EBITDA, which marked a slightly negative guidance revision. The $1 bn EBITDA line is a long way off.

The above table shows the capital structure line items across time since 2018, and the line items underscore the magnitude of the realignment from before the Hertz Chapter 11 filing in 2020 and ensuing re-leveraging of HTZ as it emerged from bankruptcy. We detail the very active capital allocation events further below.

The easy takeaway is that we see a lot more non-vehicle debt for both total and net non-vehicle debt (Hertz “corporate debt.”) We also see a much more encumbered balance sheet from term loans and secured bonds.

The First Lien Senior Notes ($1.25 bn) and Exchangeable PIK Notes ($261 mn) were part of a very busy series of 2024 financings. We also see the First Lien Revolving Credit Facility at $375 mn drawn, down sequentially from 1Q25 but up from year end 2024. As we see in the charts, the earlier years saw the RCF rarely drawn at balance sheet date and were usually for letters of credit and overcollateralization needs in vehicle funding.

The above table breaks out the trends in vehicle funding totals across various funding entities in the ABS markets and with the banks. We see ABS and MTN totals along with an array of international funding “vehicles” in the international operations. These vehicle funding entities were on the front burner during COVID as the rental fleet turned into a crisis. The collapse of travel made car rental fleets the “world’s most expensive parking lot” with debt service and depreciation payment requirements at a time when travel, car rental revenue, and earnings collapsed.

The fleet chaos, cash drain, and downsizing are all part of a longer and separate history tied up in the Chapter 11 process. The history offers a reminder of how “liened up” Hertz has become yet again during an economic expansion and multiyear travel boom. That leveraging took place in a hot credit market when it could have been terming out unsecured debt and unencumbering assets for any potential cyclical rainy days ahead. Operating trends and fleet mistakes prevented such prudent measures. Too much secured debt in a bad market would offer a reminder of what was the final straw for Hertz in 2020 at a time when Avis could make it through.

The above table goes more under the heading of “how we got here” as Hertz emerged from Chapter 11 at mid-2021 and then proceeded to derisk its private equity holders and engage in what at the time (and in retrospect) was a very aggressive set of financial policies in borrowing and buybacks.

That came with an extremely bullish stance on Electric Vehicles that soon sent the company into another residual value crisis and extremely negative EBITDA position. The company essentially turned once again into a quasi-distressed credit and lost access to the unsecured bond market.

This years peak season is over and it will barely put a dent in the earnings challenge the company faces.

See also:

Hertz:

Credit Snapshot: Hertz Global Holdings 6-12-25

Credit Crib Note: Hertz 5-14-24

Not Your Father's Hertz 2-7-23

Avis:

Avis Update: Peak Travel Season is Here 8-27-25

Credit Snapshot: Avis Budget Group 4-9-25

Credit Crib Note: Avis Budget Group 5-8-24

Avis: Gearing Up for a Transition Year in Fleet Costs 5-2-24

Avis: Credit Profile 8-3-23

Avis: Cash Flow Boom and the Swing in Car Rental 2-17-23

CPI Wrap for 2022: Beginning of the End? 1-12-23

• Avis has delivered a steady financial performance in 2025 that still features considerable volatility from the 4Q24 earnings report in early Feb 2025 through the 2Q25 numbers. The critical 3Q25 peak travel season is now underway.

• Avis presents the dilemma of high 9-handle leverage that could challenge the lofty equity valuation even as Avis offers the traditional anchor of solid free cash flow. It is easier to get comfortable with the stable credit profile of Avis than the stock valuation. The handicapping of “normalized” into 2026 is tricky as the market has been framing EBITDA in the $1 bn to $1.5 bn range. That would get leverage in a more reasonable range vs. expected EV multiples.

• For those who did not catch the 2Q25 earnings call, Avis is now looking to shift the discussion back to the broader growth opportunities across integrated mobility and the expansion of service revenue streams in high profile areas such as “mega fleet management” (notably EVs and AVs). The focus was on the Waymo partnership in Dallas and how that could expand.

• Avis is also jazzing up their product suite with Avis First as a de facto first class service to tap into the same demand (and more) for travelers that use premium offerings from airlines.

• The fleet cost trend was favorable in 2Q25, and firm used car valuations support car rental earnings via depreciation per unit (reminder: vehicle depreciation is a cash cost in car rental). The potential for lower interest rates could flow into the financing costs in vehicle funding that need to be recovered in car rental pricing. Lower financing costs can fuel better margins.

• The challenge of facing higher cost of new vehicle replacement and the potential for more tariff impacts raises a lot of risk issues as well. Car rental players can get better residual realization, but car rental companies still need to pay the piper (the OEM) for the flow-through impacts of rising material costs (steel, aluminum, copper, textiles, etc.), components, and the uncertain tariff impacts on imported vehicles.

The above stock return comp chart covers a timeline from the start of the tightening cycle in March 2022 through the latest close. The history from 2022 (well after COVID) is volatile enough even at a glance. The equity valuation challenge is underscored by the expectation that EBITDA will double into 2026 and the EV multiple is looking to find the right range (8x? 9x? 10x?). Avis securities markets still face the current LTM reality of debt/EBITDA north of 9x. That demands a lot more EBITDA to support Avis stock and bonds.

The evolving car rental industry structure and service mix…

We have watched car rental operators and the auto sector for a long time (anyone remember the Avis ESOP as a HY issuer in the1980s?), and the decades of morphing ownership profiles (the OEMs took minority and majority stakes long ago to protect their major customer volumes), industry consolidation, and changes in the OEM fleet sales policies (no more guaranteed buybacks in the US and full residual vehicle risk needs to be managed by Avis and Hertz).

The recent years after the wave of legacy Detroit 3 financial stress gave way to the challenge of technology and new services that were more promises than reality after COVID. Those other services with growth potential are now getting prioritized again. The Avis earnings call tagged the focus on traditional car rental metrics as “myopic.” That was a strange choice of words to describe metrics that frame volume, pricing, and unit cost and thus earnings, cash flow and leverage.

On the call, they focused on opportunities to leverage their personnel, infrastructure and market knowledge to be fleet mega managers as the market will see (in their view) explosive growth in robotaxis, autonomous vehicles broadly and electric fleets. The key term was “structural growth” to distinguish from recurring macroeconomic trends and opportunities in “cyclical growth.” The Waymo partnership and Dallas was the focal point. Those are topics for another day.

The idea is that infrastructure is the key. Even with EV under siege and being undermined by Team Trump, they pointed out that they continue to invest in charging capabilities and not increasing EV fleet share (a subtle dig at Hertz?). The question will be how quickly these fleets will see that scale and pace of growth. Waymo and Dallas is on the table now, but among notable comments from Avis was the willingness to commit balance sheet. With expertise in service, infrastructure and personnel, the mobility ecosystem expansion is realistic, and the experience in vehicle funding also could play a role. That will be an area to monitor into 2026.

The used car market vs. fleet replacement costs…

Among the more notable line items that every car rental securities holder and lender had to immerse themselves in since the Hertz adventure and COVID was how the used car market impacts car rental cash flow and the profit margins of car rental operators.

The Avis EBITDA margin Hi-Lo range was “other worldly” this past cycle as used cars went through the inflation spike to a peak in 2022 (see CPI Wrap for 2022: Beginning of the End? 1-12-23). Avis showed plenty of peaks and valleys in the 2021-2022-2023 timeline above, and the markets realized that car rental was about a lot more than leisure and corporate travel volumes and fleet size.

The ability to predict residual values of the fleet is an important core strength where Avis traditionally had done well before COVID when Hertz really fell down. Post-COVID, Avis took a major hit in 4Q24 in their fleet acceleration plan. As we covered in our credit snapshot earlier this year:

A $2.47 billion impairment charge was taken in 4Q24 as Avis accelerated its fleet rotation on higher cost vehicles purchased in 2023 and 2024. The impairment charge was a stark reminder of the importance of used car values and how sharp moves in new and used pricing can create costly fleet decisions.

The fleet negotiations for 2026 and next seasonal peak are still underway, and this is a very challenging variable to handicap. The OEMs clearly want to succeed with all their legacy customers, but a big variable is who will share the “tariff cost pain.” The OEMs will make maximum effort not to undermine their retail franchises and core retail base. Those dealers have become very involved in the used car business in recent years led by Lithia (see Credit Snapshot: Lithia Motors 5-20-25, Credit Crib Note: Lithia Motors 9-3-24) and AutoNation (see Credit Snapshot: AutoNation 4-4-25, Credit Crib Note: AutoNation 6-17-24). It is a major focus along the chain.

Tariff flow-through effects are going to unfold at a lag and largely based on the customer strategy of the OEMs. The idea that somehow the “jury is now in” on tariff economics or are on a game clock is rooted in the political desire to defend tariffs. The tariff costs are going higher, and that was clearly in evidence in the 2Q25 auto earnings calls. Where that goes from here on fleet costs for the car rental players will only be played out in the 2026 earnings reports.

The broader and morphing economic effects of capacity changes (less Mexico and Canada), the supply vs. demand by product segment, currency trends, or any trade partner pushback is going to take quarters – not months and certainly not weeks. The fact that the USMCA is up for review in mid-2026 (and could be terminated even earlier) is just one of numerous wildcards in the tariff debate. We still cannot even get Trump to admit that the “buyer writes the check to customs.”

The major car rental players in public markets – Avis and Hertz – do not have an easy peer group. We assembled this group in the chart above as comps to get some signals on travel (hotels and lodging, airlines), mobility (Uber) and used cars (Carvana). The main goal was to look at material moves across various time horizons. We mix in Southwest with Delta with Southwest such a major factor in the US short haul and business markets.

For Avis, the YTD period has been dazzling in stock returns and the same for 1 year. In contrast, the trailing 2 years and 3 years come up negative after the residual value bounce and mega buyback programs drove Avis numbers. The running returns since the Hertz collapse and Chapter 11 emergence at the end of June 2021 shows good numbers for Avis.

For Hertz, they squandered a very strong financial profile at exit from Ch 11 to derisk their major private equity shareholders. Then they dropped a pile of chips on EV fleet expansion in a disproportionate reshaping of the fleet. Hertz equity remains deep in negative range since emerging. With such a low stock price ($5.73 midday 8-27-25), it does not take much to ring the % change bell. They also may have broken a record for the number of CEOs in less than a decade.

Avis looking for some growth buzz…

The financial risk profile of Avis is still a juggling act between capital allocation to shareholders from free cash flow in FY 2025 (after the usual first half cash burn on fleet building and the 1Q seasonal low) and core business investment. For Avis, the goal is changing the discussion of what the company could be in the age of AVs and EVs. Avis is taking a fresh run at investment to tell a growth story. This is not a new angle and was big part of the Hertz buzz when the bidding war broke out during the Chapter 11 process.

The above table looks at the operating results since 2019 as the pandemic and collapse of travel approached in March 2020. We have looked at profit margin drama in detail in earlier commentaries (see Credit Crib Note: Avis Budget Group 5-8-24 ). The normalized margin in this business when looking back even further into the pre-COVID cycle show EBITDA margins more in the 10% area. The 2021 to 2024 margins detailed above saw 25.9% (2021) to 34.5% (2022) and then down to 20.7% (2023) before the industry struggled to find its “new normal” in 2024 and 2025.

If we assume 10% can be regained, and costs can be kept in check, free cash flow will remain very healthy. The question then is capital allocation and how financially committed Avis is to building out and investing in the new structural changes it is discussing and whether they will pay down debt.

When you look at the numbers generated by Avis and Hertz long enough, you need to remind yourself that the absence of a horrible year does not make it a good year. Avis has been a case study in predictability and execution only when framed vs. Hertz. Hertz has been on a crazy journey since 2016 that we have covered in other work (see Credit Crib Note: Hertz 5-14-24).

The travel volumes are mixed relative to what was expected for the travel sector, but pricing has been more of a challenge. Unit costs have been supportive. The seasonal 3Q period is always the peak season for car rental and travel patterns, so the year is shaping up well with FY guidance of $900 mn to $1 bn after $184 mn in adjusted EQBITDA for 1H25. That underscores how crucial the summer travel period is to annual EBITDA. That Sept quarter is typically well over half EBITDA in car rental names.

The exposure to massive swings in residual values are part of the history as cash effects as well as noncash fleet impairment charges such as Avis saw in 2024. The 2021-2022 period was one for the ages in how swings in residuals can cause dramatic moves in profit margins and cash flow. We have looked at those periods in detail in past commentaries (see links).

The above table details the main operating metrics of Avis. The good news on fleet costs per month saw the company get back to the $300 line on per unit fleet costs per month. Average fleet is modestly smaller in 1H25 vs. 1H24 after some slight growth in FY 2024 vs. 2023.

Fleet costs are the dominant line item that needs to be recovered in car rental rates with the main costs being the depreciation of the vehicle plus the financing costs of the vehicles in the funding structures. The prospects for lower interest rates thus looms large, and any interest rate movement lower on the short end of the curve would be a major win for Avis and Hertz.

The residual value risk factor for used cars has been picked over across prior commentaries and in used car commentaries on CarMax and Carvana. Generally, rising used car prices are perceived as positive by rewarding the sellers (car rental fleets) during seasonal downsizing. At the very least, the car rental operators do not want negative surprises on the estimated costs they sought to recover in rental pricing. They then get hit with a depreciation markup that is in substance a cash cost.

The tariff and vehicle cost issues are still being sorted out as OEMs make decisions on how much “to eat” on behalf of retail customers and how much to “cost share” (tariff cost share that is) with major fleet customers.

The above table highlights the trend line in fleet size, which is the core earning asset base that is generally funded separately by funding entities and securitization structures. Avis fleet size was growing again from 2021 to 2024 but has downsized YoY in 1H25. The Americas segment has grown from its size in 2019 while International has shrunk vs. 2019.

The framing of corporate debt (i.e. ex-vehicle funding entities) vs. car rental EBITDA is the critical metric for EV multiples and gauging where the equity valuation could be framed. The running 9.4x Net debt/EBITDA is not helping the current story, and Avis did not give leverage much airtime for obvious reasons.

The desire to see EBITDA at a minimum of $1 bn could get the company back into a more reasonable range for stockholders and lenders alike. As the table shows, the high margins of 2021-2023 placed Avis in a very different leverage zone with 1-handles for 3 years running.

The refi and extension activity has continued for Avis, who issued $600 mn of 8.375% bonds due June 2032 in May to repay the $500 mn floating rate term loan (drawn Feb 2025, due Dec 2025). During June 2025, Avis also repaid $100 mn of the 5.75% notes due July 2027.

With the unsecured debt issuance and refi of secured loans, Avis reduced structural subordination. At the very least, that reduction of asset encumbrances supports Avis by mitigating “rainy day contingency” risks of the sort Avis and Hertz discovered in 2020. Avis had ample room for refinancing and LOC support for vehicle funding in 2020. In contrast, Hertz ran out of lien room and ended in Chapter 11.

The vehicle funding structural nuances are something we addressed in earlier Avis and Hertz commentaries. Vehicle debt totaling $19.9 bn at 2Q25 is overcollateralized by a mix of vehicles, capital contributions, and letters of credit. The LOCs of $1.6 bn fall under the $2 bn senior revolving credit facility due 2028. Lower rates in the short end of the curve will be a blessing in the fall and into 2026 if those scenarios do play out. It is easier to be optimistic on the short rather than the long end.

The above table underscores the low capex intensity and tech-centric service nature of the core rental business. The commentary from Avis on their desire to invest in growth marks a change from the massive buybacks seen from 2021 to 2023 and the special dividend paid in 2023 after the residual value boom and record margins (see Credit Snapshot: Avis Budget Group 4-9-25).

The running tally of stock buybacks from 2021 to 2023 totaled $5.74 billion. If we add in the special dividend in 2024, we reach $6.1 bn in distributions to shareholders. That is where the total corporate debt stands at 2Q25. That offers a reminder of the cash flow generating power of Avis even if those 3 highly profitable years were not remotely normal.

See also:

Avis:

Credit Snapshot: Avis Budget Group 4-9-25

Credit Crib Note: Avis Budget Group 5-8-24

Avis: Gearing Up for a Transition Year in Fleet Costs 5-2-24

Avis: Credit Profile 8-3-23

Avis: Cash Flow Boom and the Swing in Car Rental 2-17-23

CPI Wrap for 2022: Beginning of the End? 1-12-23

Hertz:

Credit Snapshot: Hertz Global Holdings 6-12-25

Credit Crib Note: Hertz 5-14-24

Not Your Father's Hertz 2-7-23

• Toll’s July 3Q25 period saw modest gross margin pressures from a high base (25.6% 3Q25 vs. 27.4% 3Q24 with adjusted gross margins at 27.5% vs. 28.8%). TOL remains in the upper tier of the margin comps for the major builders.

• The equity market reaction was mild with TOL outperforming its large peers on earnings release day. That comes after some harsh reactions earlier in the year as some common headwinds were experienced across homebuilders (see Toll Brothers 1Q25: Performing with a Net 2-20-25).

• TOL equity had been the banner #1 performer across the trailing 2 years, but the trailing 1-year started from a strong position as weakness was racing into the builder equity performance in 4Q24 (after Sept 2024) before the recent rallies (see Footnotes & Flashbacks: Asset Returns 8-24-25).

• We have consistently viewed TOL credit quality as rock solid and the company underrated relative to the business risk, the metrics, the cash flow resilience inherent in the working capital cycles, the asset coverage, and the brand power. Toll deserves higher credit ratings with its stellar performance, mix of financial risk variables, and low industry risk.

• With net debt to capital of 19.3% on a book basis and 12.7% using market adjusted equity (8-25-25), TOL offers a lot of net asset cushion with inventory alone at 3Q25 totaling 5.7x net debt. That is impressive asset coverage.

The above stock return time series shows Toll Brothers (TOL) well ahead of D.R. Horton (DHI) and Lennar (LEN) as the Big 2 of homebuilding (#1 ranking depends on unit volumes vs. dollar revenues). DHI and LEN offer a broader view of the overall national housing market across more price tiers, and TOL fits in with the narrow luxury segment.

With TOL posting the highest average selling prices of the Top 10 public builders and DHI the lowest in that group, the three combined make for a useful frame of reference even if the median TOL homebuyer is not the median DHI or LEN buyer (see Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25).

As past commentaries have detailed and TOL routinely highlights on its earnings calls, the well-heeled customer base of TOL and the ability to design and price homes consistent with a healthy margin have been tested against a mixed backdrop of high mortgage rates. TOL is a differentiated way for the equity market to play the housing cycle than the average builder and the same fundamental distinction applies in credit markets.

The time horizon in the chart begins at the start of March 2022 when the tightening cycle sent short and long rates on a multiyear ride that saw mortgages in a 200 bps range from fall of 2023 through current days. We look at those UST curve trends in our rolling yield curve updates (The Curve: Powell’s Relief Pitch 8-24-25).

We add more time horizons for equity returns in the above chart, and we line them up in descending order of YTD total returns. The recent rebound is in evidence after a very rough path across 4Q24 and into the early spring with the rolling 1-month and 3-months period above underscoring the rally. TOL hung in better in the initial downdraft in late 2024 and early 2025, so had less room to rally.

We see TOL in the top 5 YTD at a modest +10.8% vs. Pulte at #1 with 22.0% and DHI #2 at +21.9%. Lennar is modestly positive at +4.2%. We see 1Y in the red for TOL at -6.0%, but the 2Y horizon ranks TOL at an impressive #1 with a +82% return.

On a broader industry note, the chart offers a reminder of how impressively the homebuilding sector performed well into the tightening cycle even with mortgage rates rising and the economy doing well. That came to a screeching halt in 4Q24, and now we are moving back into a bounce as noted in the chart. Toll is +33% over the trailing 3-months vs. +21.8% for the Homebuilder ETF (XHB).

The above table details the results of operations for TOL, and the numbers highlight the steady solid margins alongside resilient revenue and earnings. The 3Q25 quarter (7-31-25) saw a favorable volume variance at +5% along with a slight tick higher in average selling prices (ASPs) for the quarter but a weaker ASP trend YTD 9M FY2025. The 3Q25 home sales revenue line was in fact a record. Net signed contract value was flat YoY vs. 3Q24 while contracted homes by units edged lower by -4% with ASPs up +4.5% to $1.0 million.

The margin story is still constructive relative to the direction seen at other major builders. Home sales margins dropped to 25% handles in 3Q25 at 25.6% vs. 27.4% in 3Q24. Adjusted gross margin (ex-interest and inventory write-downs) was 27.5% in 3Q25 vs. 28.8% in 3Q24. These are strong margins in historical context as highlighted by the 2019 to 2021 margin history in the table. Guidance is calling for a 27.0% adjusted gross margin in 4Q25 and 27.25% for FY 2025.

The above table highlights the ASP trend line for the highest price levels among the major builder peer group. The ASPs for Toll are more then double the median national average for all new homes (see New Home Sales July 2025: Next Leg of the Fed Relay? 8-25-25). As always, the Pacific geographic segment is in its own price zone at over a $1.5 million.

The above table details the geographic revenue mix and trend line with the Mountain region leading the pack through 9 months just ahead of the South. The Mountain region is #2 in total units through 9 months at 2,335 units with the second lowest ASP at $874.9K. The South is #2 in dollar revenue through 9M 2025 but #1 in units at 2,456 with the lowest ASP of $823.6K.

The highest ASP region of the Pacific has the lowest volume at 933 but in a very pricey region. The #2 region in ASP is the North at over $1.0 million ($1,025K) but second lowest in units through 9M 3Q25 behind the Pacific.

The balance sheet is strong even if book value leverage ticked higher pro forma for the $500 million bond deal priced in June (5.6% of June 2035) that saw the redemption of the $350 million of 4.875% due Nov 2025.

Net debt to cap of 19.3% at 3Q25 was down sequentially from 2Q25 but up from 15.2% at 4Q24. The asset coverage metrics have improved with cash + inventory rising to 4.1x total debt at 3Q25 vs. 3.9x at 4Q24.

See also:

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Toll Brothers: Rich Get Richer 12-12-24

Toll Brothers: A Rising Tide Lifts Big Boats 5-23-24

Credit Crib Notes: Toll Brothers (TOL) 9-11-23

Toll Brothers F2Q23: Company Comment 5-25-23

Housing sector:

New Home Sales July 2025: Next Leg of the Fed Relay? 8-25-25

Existing Home Sales July 2025: Rays of Hope Brighter on Rates? 8-21-25

Home Starts July 2025: Favorable Growth YoY Driven by South 8-19-25

Other Homebuilders:

Taylor Morrison 2Q25: Resilient but Feeling the Same Macro Pressure 7-25-25

PulteGroup 2Q25: Still-Lofty Margins see a Mild Fade 7-23-25

D.R. Horton 3Q25: Material Slowdown Still Good Enough 7-22-25

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

• The H&E Equipment Services (HEES) deal closed in early June, and HRI needs to prove the higher financial risk can be easily navigated along with the integration of this transformative acquisition (see Credit Crib Note: Herc Rentals 12-6-24).

• The HEES deal sent leverage to 3.8x, and that is well above the range we see for the traditional BB tier balance sheet for this business with 2 handles more the norm in the BB tier. (Herc Rentals: Swinging a Big Bat 2-18-25)

• The cyclical questions will loom large into the tail end of 2025 in terms of how capital allocation will play out into 2026 with this healthy free cash flow generating business.

• We assigned a “negative credit trend” on Herc since the HEES deal (see Credit Snapshot: Herc Holdings 4-23-25) given the high leverage and execution risk. We still see the financial risk profile ahead of its credit ratings, but the history of this industry in sustaining credit quality is favorable with cash flow resilience and capex flexibility a feature.

• The good news for Herc bondholders is HRI credit quality is “performing with a net” with United Rentals posting a market cap almost 14x HRI and Ashtead 7x HRI in a consolidating industry. This is positive event risk symmetry.

The above stock chart highlights the healthy run for the leading equipment rental leaders across the COVID crisis, into the cyclical rebound, and then on across the inflation spike and tightening cycle that brought more than its share of volatility. Equipment leasing companies outperformed the broader market benchmarks over the post-COVID time horizon. The recent weakness of HRI has been notable but also unusual. Doubts around the H&E Equipment (HEES) integration process will need to be eased in 3Q25 and 4Q25.

Outbidding United Rentals for HEES was no small victory given HRI’s need to expand, but the aggressive move and the price tag raised questions on overpaying given the strategic importance of making a move. The HEES deal dwarfs anything that Herc has attempted since the June 2016 separation from Hertz, and the execution risk is not a small factor for shareholders.

The above time horizon table updates how Herc (HRI= Herc Holdings) has performed over multiple time horizons from very recent timelines back to 10 years. We line up the companies in descending order of total return YTD 2025. United Rentals and Ashtead are well ahead of HRI.

As the earlier stock chart has underscored since the end of 2019, HRI has been a solid performer and beaten the S&P 500 and Ashtead but fallen well short of United Rentals as the industry leader and juggernaut of M&A across the cycles. We see HRI really taking a beating YTD 2025 in its stock performance at -33% in the chart above and in the red zone for the trailing 1-year period.

The more recent periods have shown some backtracking for the industry after a very solid multiyear run. Even URI had faded from its 2024 peaks before regrouping and getting back on track. The multiyear megaprojects, steady industrial investment, and the cash benefits of the tax bill for equipment investment still carry the day when taken in tandem with the secular trends and a lot of scenarios for reshoring in the future – even if it takes a while.

The core customer markets across major projects (infrastructure, data centers, LNG, semis, utilities/power, healthcare, EVs/batteries, etc.) make for a story that always will get stock players back in the game on weakness. Free cash flow generation, flexibility in capex, and consistent shareholder enhancement and favorable capital allocation is just such an obvious part of the industry history at this point. The challenge for HRI is showing that they are a cheaper alternative in debt and equity and not just a struggling M&A story.

As we see with the other leasing issuers, the EBITDA margins are quite high but that also leaves room for replacement capex to sustain revenues and growth capex to expand the operations. One of the useful exercises in reviewing the equipment leasing operating results is they always come equipped with substantial information on end markets in their detailed slide packs (note: heavy on Dodge Analytics data).

From a top-down macro view, mega project starts are impressive in 2025 at over twice the level in 2024. Nonresidential starts are slated to climb each year from 2025 to 2028. Industrial spending will also be higher than 2024 in each year from 2025 to 2028. The same is true of infrastructure starts. That is a lot of activity.

We have covered the core operating profiles of equipment leasing operators in prior commentaries. Disciplined fleet management (supports pricing) and sustained growth in the business from so many expansion programs in mega projects are the main themes. That fits in well with the secular increase of leasing vs. owning in the “lease vs. buy” decision. Local accounts have been under pressure, but national accounts have been strong. The project pipeline is solid. As of 2Q25, Local was 53% of revenue and national 47%.

As noted in the chart above, operating results have posted solid numbers in terms of revenue growth and EBITDA margins as well as Rental EBITDA (“REBITDA”) and rental margins. Like the June quarter, the 3Q25 period will have more than a few underlying distortions with integration costs and some mixed results from the HEES side as customer disruptions and personnel changes unfold. There will also be some mix shifting as HRI pushes ahead on its specialty fleet adds while selling off a material amount of fleet in the merger.

For 2Q25, HRI posted +14% in rental revenue including the June 2 merger results but was -2% pro forma with Herc legacy branches at +4% and legacy H&E at -14.1% YoY. Mergers can be disruptive and that was clearly the case here. The systems will be integrated in 3Q25, so “legacy rollup data will no longer be available.”

The balance sheet realignment was certainly busy for Herc during 2Q25 with the HEES deal closing on June 2. By the book (literally), the net assets acquired totaled $4.83 billion including $2.2 bn of goodwill in the price tag. Since the end of 2024, total assets grew by $6.14 bn (including $1.8 bn of rental equipment) and total debt grew by $4.2 bn. The leverage of 3.8x is quite high for what we have seen in recent years for BB tier leasing companies, but HRI expects to be back in the 2x to 3x range by 2027. The rating agencies have given HRI a considerable amount of latitude.

The deal funding was multitiered to pay the price tag in cash and stock but also included some major refinancing demands of HEES debt and refinancing of the ABL lines that are actively used by equipment leasing companies. The funding checklist included $2.75 billion of new unsecured bonds, a $750 million term loan, $584 million in HRI equity, and $2.5 bn in new ABL borrowings that included $1.6 bn that needed to be refinanced.

The bonds came at a level that carried 7% handle coupons as part of M&A refinancings priced to sell, and those are good opportunities for HY investors. As we have covered in our Herc commentaries, we viewed the financial trend line for HRI as negative after this deal, and we believe that HRI presented more of a single B tier profile vs. the low BB tier composite assigned by the rating agencies. That said, Herc has the financial risk cushions and cash flow stabilizers that have come to be recognized in the equipment leasing issuer base. URI is the leaders of the pack with Ashtead at #2 and Herc a distant #3. A fund manager and income seeker was not going to let the 7.0% coupon pass by on the $1.65 bn 2030 notes or the 7.25% on the $1.1 bn 2033 notes.

The downside scenario for Herc bonds is a deep economic downturn and setback on valuation where HRI ends up owned by one of the Big 2 (notably URI are #1). The end markets for now remain steady as covered in our recent work on the major leasing issuers, but a cyclical contraction could wreak havoc in HEES’ integration and slow the deleveraging process. We don’t see that as likely. Confidence in the integration seems to be struggling as highlighted by the weak performance of HRI stock in recent periods.

The moving parts of capex and fleet planning across various locations and equipment types and managing new capex vs. equipment sales dominates what these equipment leasing companies do. Gross capex and net capex are moving quickly. HRI will see materially lower net capex this year as the integration continues and HRI rolls up the operations.

Incremental gross capex for 2025 guidance calls for $900 million to $1.1 bn. Net rental capex (gross capex less equipment sales) is estimated at $400 mn to $600 mn vs. $760 mn above. That is a reduction by almost 1/3 on outsized equipment sales and fleet integration focus. The increased spending on specialty is consistent with peers.

The 2025 free cash flow guidance calls for $400 mn to $500 mn. HRI already had started to significantly increase its equipment sales in 2Q25 in anticipation of integrating the HEES fleet for additional realignment. As of 2Q25, the fleet composition includes specialty (18%), aerial (26%), material handling (22%), earthmoving (14%), and a diverse bucket under “other” at 20%.

See also:

United Rentals: Cyclical Bellwether Votes for a Steady Cycle 7-29-25

Credit Snapshot: Ashtead Group 7-21-25

Credit Snapshot: Herc Holdings 4-23-25

Credit Snapshot: United Rentals 4-1-25

Herc Rentals: Swinging a Big Bat 2-18-25

United Rentals 4Q24: Strong Numbers Set the Table 2-2-25

United Rentals: Bigger Meal, Same Recipe 1-14-25

Credit Crib Note: Herc Rentals 12-6-24

Credit Crib Note: United Rentals 11-14-24

Rental Equipment: A Cyclical Confidence Booster 9-15-23

Ashtead 4Q23/FY 2023 - Company Comment 6-14-23

• We update Iron Mountain’s financial and operating profile for mid-2025 as double-digit revenue and EBITDA growth, very strong discretionary cash flow, and a sustained high rate of growth capex remains a core part of the valuation story line. IRM 2Q25 posted record revenue, record EBITDA, and record running growth capex while keeping leverage stable.

• The exceptional performance in the equity markets vs. comps in recent years relative to REITS, data centers and market benchmarks started lagging after such a great run, but double-digit revenue and EBITDA growth to across-the-board records was accompanied by an upward revision in guidance.

• Despite record capex and higher total debt levels, we see stable debt leverage metrics on rising revenue and EBITDA. The one-two punch of legacy business free cash flow and valuable higher margin reinvestment opportunities in attractive growth businesses (notably data centers) make IRM a very different company than the legacy income stock and HY bond issuer of bygone days.

• IRM has a hybrid business mix with extensive, granular disclosure that can make picking up coverage of the name a challenge, but IRM is one worth following in credit as well as in equities. In credit, IRM is the #8 issuer in the BB tier and #15 overall in the HY index. The cap structure includes a major revolver and term loans on a global scale.

• The business mix weighting is shifting gradually toward data centers and digital services but those remain in the minority of revenues relative to legacy high margin physical storage operations. The growth segments have been a big part of the shift in equity valuation metrics as well as dominating the capex budget. For IRM, “growth capex” dwarfs recurring capex as we frame further below. The recent 19x EV multiple at 2Q25 is a long way from the low teens in the pre-COVID period.

• IRM has not been broadly covered in equities by the “street” data center or REIT analysts despite the sustained growth on both sides of the balance sheet and its sheer scale. IRMs rise in the S&P 500 rankings over the past decade (low 300 range now) and bond market presence make it a priority name.

The above chart plots the stock return timeline for IRM since the end of 2019. It has been quite a ride (disclosure: we have been in and out of IRM stock over the years but no current ownership). We plot the return time series for IRM against the S&P 500, the NASDAQ and the REIT-heavy real estate ETF (XLRE). In the following time horizon table, we also compare IRM vs. the digital infrastructure and real estate ETF (IDGT) that includes numerous data centers. The weakness of REITs during markets with rising rates make IRM stand out even more.

As evident in the chart above, the impressive run in IRM equity started to fade in 2024. That does not mean the financial fundamentals are stalling, but the dip is more about framing the relative equity valuation and growth potential in 2025-2026. The recent weakness is more in the context of how far the IRM equity had already run.

As we said back in our December 2024 note on the company: “Even if a stock watcher is of the view that the stock is rich and has come “too far, too fast,” the credit quality comfort is in the revenue and EBITDA growth and the discretionary nature of the major growth capex programs. In other words, if markets slow down, so will the pace of growth capex as a stabilizer of financial risk metrics.

For credit investors, the steady growth and solid profit margin profile matches up well with a very deep asset base. IRM is an asset-heavy operation with a services stream of earnings that has clear growth prospects ahead. The bullish growth potential is underscored by its capex numbers and the empirical evidence in its data center growth.

IRM has seen the expansion of a range of digital services operations and emerging businesses such as Asset Lifecycle Management. IRM tells a good story of cross-selling and how the natural economic path of so many data and storage businesses feed into new revenue streams.

The above chart offers various time horizons vs. broad market indexes and some additional ETF benchmarks. The results highlight the superior performance across the cycles and steady execution across a cycle that included a pandemic and the first Fed inflation fighting bout since the early 1980s. The trailing 2 years, 3 years, 5 years and 10 years stand out vs. comps. The comparison with the REIT-heavy Real Estate ETF (XLRE) and the data center heavy IDGT ETF offer some useful frames of reference.

We have been tracking Iron Mountain for almost a decade, and the transformation has been very impressive as IRM converted to REIT status (effective 2014) and shifted its business mix into more growth markets across data centers, asset life cycle management services, and digital solutions for data and documents. We have covered those issues in detail in past commentaries (see links at the bottom), so we don’t have to revisit those topics here. IRM is in many ways a peer group of one, but IRM frames up well vs. narrower industry leaders.

The main themes are higher growth and higher value business lines in expansion mode. Importantly, we need to flag the anchors of exceptional gross margins and low capex intensity in legacy storage business lines that “feed” reinvestment in its growth capex operations. IRM can boast the proven depth of readily available funding sources in the unsecured bond markets from BBB tier buyers stepping down across the speculative grade divide and reliable demand from the higher quality BB HY buyer.

We drop in some bellwether REITS and Data Centers in the table above along with some major HY market services companies. These offer some logical frames of reference and notably for those playing in higher quality and mainstream HY names. We line them up in descending order of trailing 1-year equity returns. The chart offers some food for thought on industries that are often pummeled by rising rates (REITs) and those that have reaped the rewards of the data center boom.

There are some that are idiosyncratic stories (e.g. Aramark, ADT) as well as some secular growth stories with strong cash flow fundamentals that were also winners. Looking back across the years, United Rentals and IRM showed the ability to push through a tough tightening cycle as well as COVID turmoil. URI is clearly an unusually strong story (see Credit Snapshot: United Rentals 4-1-25). In equities, the valuation run for IRM is now facing some challenges as it outpaced some market views on sustainable growth metrics, but the credit story is stronger than it has been across this timeline history.

With a low BB tier composite credit rating in the HY index, IRM is on the short list of “most overdue for an upgrade” (and has been for a while). That is especially the case in light of how it has grown and its overall metrics relative to BBB tier REITs. IRM credit ratings are a victim of IRM’s own distinctive business mix in getting treated like a HY Services operation and not a REIT and tech play.

The credit ratings tend to treat IRM like a HY services company with a 5x leverage metric as opposed to a massive cash flow generator that is asset rich in key growth sectors at the same time as posting high margins with slow-growth legacy businesses offering recurring high margins and high cash flow. The legacy business differentiates IRM from other data center operations in being there to support growth capex and recurring dividend requirements consistent with its REIT status. The 5x lease-adjusted leverage for such an asset rich, high margin growth story is not a HY balance sheet. It is IG quality.

The evolution has seen IRM shift from a pure income stock “back in the day” with low multiples, high dividend yields, and high leverage (and a legacy HY bond issuer) to an increasingly tech-centric growth story with higher margins and very healthy discretionary cash flow. IRM posts a high EV multiple over 19x at 2Q25) that is almost 4x IRM’s leverage ratio. Despite that valuation profile, the extraordinary growth of the asset base has not gained IRM much traction with the credit rating agencies.

From our vantage point, a company with a 19X EV multiple vs. leverage of 5x (even if using EBITDAR based-metrics) makes for a very strong financial profile. IRM’s very high margins in its legacy storage business and rapid expansion and increasing share in high growth business lines such as data centers offer a lot of comfort. That all makes for a good cyclical and secular story.

The above table underscores the theme of growth in revenue and EBITDA along with 30% handle EBITDA margins. IRM cited all-time records for revenue, adjusted EBITDA, and AFFO (Adjusted Funds from Operations). As highlighted by IRM: “Data center, digital, and asset lifecycle management (ALM) businesses collectively grew more than 30% (for 2Q25).” That growth rate in high margin businesses has overhauled the context for evaluating credit risk as well.

IRM highlighted it is on track for its 37th consecutive year of organic storage rental growth. IRM also flagged 26% organic storage growth in data centers. IRM’s “commercial” highlights its global scale and cross-selling opportunities within a large and a well-established client base as they enter new service lines. The IRM sales pitch has been consistent across time, and it has been backed up by IRM’s numbers and execution.

The above table updates the segment results, and we see revenue and EBITDA growth that still translated into EBITDA margin expansion in 1H25 even if data center segment margins narrowed slightly for the 2Q25 period to a still lofty 50.8%. For 1H25 in Global Data Centers, we see higher revenues from organic storage rental growth and material YoY margin expansion on “lease commencement, improved pricing, and cost containment.” In other words, there are favorable results on the other side of the record growth capex.

The increased revenue and margins in the RIM segment for 1H25 organic storage rental growth and pricing power while organic growth in RIM services was in part tied to digital solutions services growth and higher volumes in legacy services mix.

The gross margin of over 70% (not shown above) in legacy storage rental (Section V in the quarterly supplemental disclosure document) is always worth highlighting since it serves as a massive cash flow generator that helps feed the cash flow available for dividends and growth capex.

“Corporate and Other” has an asterisk on it as detailed in earlier commentaries since it is not just a catch-all for “other corporate” as we often see in segment disclosure. The corporate segment includes Asset Lifecycle Management (ALM) operations and related services with $362 million of revenues set against the corporate segment expense base.

The above table updates the balance sheet trends of IRM as assets and debt both keep growing along with revenues and EBITDA. We see $15.6 bn in total debt at the end of 2Q25, and that includes around $9.3 bn in index bonds housed in the HY index and BB tier. As noted earlier in the bullets, that amount of bonds makes IRM #15 in HY index rankings and #8 in the BB tier. IRM’s position in the S&P 500 is around #314.

We are always surprised that IRM gets relatively low research focus in debt and equity. That is now changing with the data center play on the name, but more than a few data center purists will not pick it up and some REIT analysts duck the name. On the flip side, some legacy business service analysts do not want to let it go.

For the narrow balance sheet story, the level of detail in the debt footnotes each quarter is daunting given the global scale and multicurrency array of facilities and goal of managing currency risk vs. their revenue and asset currencies. The array of Revolvers, Term Loans, Mortgages, nondollar layers, and leases makes for a complex capital structure that may actually have held back the credit ratings. The granular disclosure and long history of the company in the markets and its global scale across 61 countries paints a picture of a disciplined and prudent liability management operation.

During 2Q25, IRM amended the credit agreement and increased the Term Loan A. IRM increased and extended the Aussie Dollar Term Loan. As noted in the table, the 5.0x lease adjusted leverage is well inside the requirement. Definitions and carve-outs with the banks have morphed over time and the “rent-adjusted” factor moved lower from 8x to 6x rent back in 2018.

IRM’s global scale and reach feeds into the data center story when many nations have data centers high on their priority list from the Middle East to Asia and Europe. That is especially the case where low-cost power is a competitive edge (Middle East).

The above table updates the capex mix across “growth” vs. “recurring.” The growth component dominates the capex story at over 94% of total in 1H25 and 91% in 1H24. The absolute levels of growth capex rose by 53% in 1H25 vs. 1H24, and that was after a 41% increase in growth capex during 2024 vs. 2023.

We have covered capex issues in earlier commentaries, but we would again highlight that growth capex multiplied by over 5-fold from 2018 to 2024 in a sign of IRM’s aggressive expansion in data centers, which rose almost 9-fold on the growth capex line from 2018 to 2024. Data centers accounted for 81% of total growth capex in FY 2024 and 89% of growth capex in 1H25.

The projected FY 2025 capex provided by IRM calls for $1.95 bn total in FY 2025. That is certainly consistent with the recurring headline commentary in the markets and from so many service providers and suppliers to those sectors including equipment rental.

For purposes of credit risk, the capex line is reassuring in magnitude given the discretionary nature of the planning and the ability to adjust the capex strategy over time with the operations set against much-enlarged revenue, EBITDA and cash flow base as some of these mega projects mature.

The equity markets are still wrestling with how to price all this growth into the IRM valuation as we saw the massive run in IRM equity falter in 2024. For credit quality, the outlook is positive as the revenue and cash flow performance is an anchor along with the exceptional asset coverage.

The above table updates the usual metrics from REIT guidelines and the traditional GAAP funds flow disclosure. Again, the capex line is the one that jumps off the page and which is consistent with all the mega project and data center headlines we all routinely see.

As covered in earlier commentaries on IRM (see Iron Mountain: Credit Profile 4-15-23), the dividend story line is one that tweaks the analytical framework given the REIT status and related requirements that they break out in detail in their usual SEC filings. Unlike the typical HY issuers analysis, you analyze debt funding needs for growth after giving weight to the projected dividend – not before.

At times we have heard people say “they are borrowing to pay their dividend” (a no-no in credit analysis 101). In fact, IRM is planning their debt funding needs after the dividend to fund the growth strategy that has driven a great stock valuation trend for IRM and stellar financial metrics. We see both sides of the balance sheet growing (total debt and total assets) and we see basically everything growing (Revenue, EBITDA, capex) which in turn allows for “organic leverage declines” or stable balance sheet metrics on rising EBITDA. We covered that in the balance sheet section of our IRM work.

See also:

Credit Snapshot: Iron Mountain 4-15-25

Iron Mountain 4Q24: Performance Bar Gets Raised 2-15-25

Credit Crib Note: Iron Mountain 12-18-24

Iron Mountain: Good Climb, Summit Unknown 11-10-23

Iron Mountain: The Quiet Man 4-16-23

Iron Mountain: Credit Profile 4-15-23

• The equipment rental business has always been one of our favorite indicators for cyclical end market signals whether in non-residential construction or across the wide range of industrial verticals on the other side of the lease. URI is sending more favorable vibes than we picked up from Ashtead in terms of capex guidance and as URI offers color from its Customer Confidence Index.

• The value of the URI guidance is rooted in the depth and breadth of its customer base with 1,615 North American branch locations and over 27K employees that all roll up into a very useful lens to gauge customer activity and expectations. The resilience of the URI capex program and related guidance is another vote of relative optimism during June quarter earnings.

• URI jumped on earnings day by almost 9% as the buyback program grew by $400 mn and guidance was generally affirmed at the midrange for capex and EBITDA. The increased buyback guidance was based on the incremental cash flow impact of the bonus depreciation terms of the tax bill, but the capex guidance is to us the main cyclical gut check each quarter. Gross and net rental capex were unchanged.

• Solid growth in Specialty Equipment, EBITDA margins in the mid-40% range, and favorable secular growth in leasing vs. buying are the usual anchors for optimism on free cash flow and low leverage that support the credit profile.

The above chart frames the running performance of the equipment leasing equities vs. the S&P 500 since the end of 2019. The easy takeaway is that all 3 beat the S&P 500 over that timeline even as Herc Holdings took a beating today after its earnings.

United Rentals (URI) is a clear winner by a healthy margin on its exceptional growth trajectory fueled by M&A and heavy reinvestment (see Credit Snapshot: United Rentals 4-1-25, Credit Crib Note: United Rentals 11-14-24). URI’s stock jumped higher by almost 9% with its earnings report last week as its buyback guidance was increased. URI equity is higher by around 17% the past month including today’s weakness.

Ashtead and its Sunbelt unit have lagged URI in relative terms after a great decade of expansion (see next chart), but Ashtead is still ahead of the broad market (see Credit Snapshot: Ashtead Group 7-21-25). Herc Rentals (HRI Holdings) was pummeled today after its earnings report with the stock off by over -17% as we go to print. That continues a volatile history. Even with that effect. HRI has had a good run across this latest cycle.

As we cover in our Herc Rentals single name work, we have been negative on the credit story given HRI’s rating in the BB tier and the post-deal leverage and execution risk (see Credit Snapshot: Herc Holdings 4-23-25, Herc Rentals: Swinging a Big Bat 2-18-25, Credit Crib Note: Herc Rentals 12-6-24). Herc will be an adventure, but if they lag, they could just as easily end up owned by one of the Big 2. URI’s market cap is over 13x that of HRI.

With 7% handle new issue coupons in a very tight market and a distinctive industry profile in portfolio context, it was easier to get comfortable with Herc new issue bonds in its recent M&A refinancing in June. That was a matter of price, and the deal was placed as a single B tier value at the time. The rating agencies have certainly given Herc Rentals (HRI) a lot of credit for executing on a balance sheet repair program.

As we have covered in the past, the equipment leasing industry has demonstrated its lower business risk profile over and again and the cash flow flexibility and low leverage of URI especially should earn more benefit of the doubt at this point for across-the-board IG ratings on URI unsecured debt.

The above table offers a broader review of the equity returns for some notable manufacturers of capital goods combined with the Big 3 equipment leasing companies (URI, Ashtead, Herc). We set the return timeline at Friday close, and we should flag that HRI is now at just worse than -34% YTD (-17% for HRI so far on the day) as the market reacts to the HRI earnings release. The table above also details the S&P 500, the Industrials ETF (XLI), and the Equal Weight S&P 500 (RSP).

The comp chart shows equity returns across a range of time horizons. We line up the companies, ETFs and benchmarks in descending order of YTD total returns. URI certainly distinguishes itself in the group over a range of time horizons and notably over 5 and 10 years as well as before and after COVID. Ashtead also posted a very strong 10 years but has faced more headwinds in recent years.

The aspect of the table above that might be a surprise to some is how well so many of the equipment manufacturers have done YTD. Some of the names are global in scale and some more US-centric. As the recent asset returns highlight, the Industrial ETF (XLI) has been a very solid performer as the conviction runs high that the most damaging trade war risk will be averted (see Footnotes & Flashbacks: Asset Returns 7-27-25). That scenario has clearly worked well for optimists as the in-substance capitulation of the EU and Japan drives home (they of course will not frame it that way). Those outcomes with the EU and Japan do not bode well for the size of the Canadian and Mexico seat at the table.

The above table highlights the steady growth of the core rental business with URI rental revenues almost doubling off the COVID lows. The total revenue line highlights the activity in the fleet with the recurring sale of equipment and reinvestment in fleet expansion via capex or acquired fleet.

The simple way to look at the plan from a financial risk perspective is that URI grows its asset base faster than its debt whether it is “buying EBITDA” via M&A or investing heavily in fleet growth via capex. The balance sheet has become stronger even while returning cash to shareholders. URI’s results and the market reaction to their strategy have been impressive. The only ones moving slowly are the credit rating agencies.

The URI story has been one of ongoing expansion of its fleet, broadening of its equipment categories and geographic clusters, and achieving a level of diversification that all adds up to lower portfolio risk in the classic sense.

URI was a major beneficiary of the fiscal support and industry trends that cut across mega projects in infrastructure, data centers, energy (notably LNG), power, semis, and the upside from theoretical reshoring/re-industrialization. Reshoring hopes includes major industries on the other side of protectionism (pharma, metals/mining, auto capacity redeployment from Mexico and Canada, etc.).

The mid to high 40% handle EBITDA margins have been consistent, but URI is seeing some mild compression YoY in 2025. A 45%+ margin leaves a lot of room for capex and capital allocation flexibility and to fund buybacks and dividends as noted in the cash flow chart detailed further below.

The above table highlights the segment trends with Specialty generating higher margins than the General Rentals mix but both segments generating record revenue run rates. Specialty rental revenues climbed by 14% YoY for 2Q25 and by 17.6% in 1H25.

The above table underscores the strong balance sheet of URI with the past two years ending comfortably below 2.0x leverage as organic deleveraging on rising EBITDA continues to be a hallmark of URI. The longer-term financial trends show URI’s ability to grow its revenue, cash flow and asset base at a rate well in excess of growth in debt. For one frame of reference, URI’s total asset base has increased by over $10 bn since 2019 while total debt has risen by less than $2 bn. Leverage of 1.8x is down sharply from 2.6x in 2019.

As we see in the URI stock performance since 2019 captured earlier in this note, the post-COVID expansion has seen URI grow its business meaningfully by capex, reinvestment and acquisition. High margins are sustainable, and URI has regularly demonstrated its ability to allocate free cash flow in a balanced fashion to reward shareholders and protect credit quality.

The resilience of URI’s financial risk profile has been demonstrated across a TMT bubble that burst only a few years after URI’s IPO, a housing bubble meeting an even worse fate, a systemic bank crisis that saw the longest recession since the Great Depression, a pandemic, and the first major inflation cycle in 4 decades that triggered an aggressive FOMC tightening. That is more than a real world stress test for the industry, but it also speaks to the resilience of a US economy that is larger and more diverse than ever despite myriad policy risks and trade tensions.

The above table frames the scale of acquisitions, stock buybacks, and dividends across time. URI can line up a $1 bn acquisition as a matter of routine and easily fund them with ABL lines and unsecured bonds in whatever combination they choose and even do 100% unsecured bonds up front. Along the way, URI just keeps throwing off free cash flow.

When URI buys a major equipment leasing operation, it is always good to keep in mind a hefty base of EBITDA and some more product and customer diversity come along with cross-selling opportunities (in both directions) in those deals.

The double-digit billions of dollars of deals across the decades and successful track record make the acquisition line in the chart above a positive for equity holders and neutral for bondholders. URI has gained such a reputation in M&A that when Herc stepped in front of URI on the HEES deal, the more immediate assumption was that HRI must have overpaid. HRI needed to make a move to play catchup, and that was a separate factor.

The above table details the moving parts of operating cash flow, capex, and how that flows into free cash flow. The history is very reassuring for lenders and equity stakeholders. The very high EBITDA margins in equipment rental come with the asterisk that there is an embedded capex need to sustain that revenue base. The level of replacement and maintenance capex vs. growth capex is not as transparent as it used to be, but there is no changing the intrinsic competitive advantage of being able to purchase on such a scale. URI can realize superior utilization of the assets with captive labor cost leverage in areas such as fleet maintenance and repair. They also can manage the fleet size through a deep secondary market for used equipment, again highlighting financial flexibility.

See also:

Credit Snapshot: Ashtead Group 7-21-25

Credit Snapshot: Herc Holdings 4-23-25

Credit Snapshot: United Rentals 4-1-25

Herc Rentals: Swinging a Big Bat 2-18-25

United Rentals 4Q24: Strong Numbers Set the Table 2-2-25

United Rentals: Bigger Meal, Same Recipe 1-14-25

Credit Crib Note: Herc Rentals 12-6-24

Credit Crib Note: United Rentals 11-14-24

Ashtead 4Q23/FY 2023 - Company Comment 6-14-23

• In a very busy week for homebuilder reporting, Taylor Morrison (TMHC) posted up a reasonable quarter in industry context including higher volumes that more than offset lower prices and generated higher home sales revenues. Then again, the lower orders at TMHC reinforce the housing sector pressures we have heard about in other earnings calls.

• We still see TMHC well positioned to be investment grade on the balance of factors, but the balance sheet progress has been slowed in the capital allocation balancing act. Inventory remains more than triple total homebuilding debt, and the cash flow resilience has a lot of risk-mitigating value for bondholders during a period of cyclical debate.

• The macro crossroads for homebuilders right now is a cyclical slowdown that could feed more optimistic mortgage rates and yield curve scenarios that would give the housing sector the lift it needs if mortgage rates retrace to the 6% area seen with the Sept 2024 easing.

• The flip side of the favorable mortgage rate scenario is any tariff-driven inflation or stagflation would take a negative toll. Any setback in housing would need portfolio context since a curve steepening or stagflation bout flows into a lot of portfolio line items and a broader repricing of credit risks. Homebuilders have the intrinsic cushion of inventory liquidation that generates cash flow in slowing markets.

The above chart frames TMHC against some other bellwether BB tier homebuilding bond issuers – KB Home (KBH) and Tri Pointe (TPH). TMHC is a name we have had a positive view on and still do in peer group context (see Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25, Credit Crib Note: Taylor Morrison Home Corp 5-20-24).

TMHC is a solid high BB tier composite and remains well positioned even though the builders are heading into a soft patch as covered in our housing sector macro commentaries and single name work (see links at bottom). TMHC has 3 index bonds with relatively short maturities (2027, 2028, 2030) and 5% handle coupons.

The above table details the operating results for TMHC with the headline numbers showing higher home closing revenues for 2Q25 and 1H25. Financial services revenue is also higher for both 2Q25 and 1H25. As we detail in the next chart, TMHC posted higher volumes in 2Q25 but slightly lower ASPs.

The wind down of the peak period in 2025 will see the housing sector turn on pricing strategies and mortgage rates. The homebuilders – like the potential existing home sellers – need to make a decision on pricing to clear the market and push transaction volumes higher. Many potential buyers (first time or move-up) are waiting for a clear read on where mortgage rates will head in the broader market whether that UST move is tied in part to the fed or to the broader economic and inflation impacts (tariffs, etc.) on the 10Y UST that drives 30Y mortgage rates.

The above table digs into the three geographic segments and related metrics. The homebuilders tend to be more creative in how they classify different regional segment breakdowns. The “East” for TMHC is heavy on Florida metro areas and also includes Atlanta and Charlotte. “Central” includes the major Texas metros plus Denver and Indianapolis. The “West” includes Southern California, the Bay Area, Sacramento, Las Vegas, Phoenix, and Seattle as well as Portland.

As a reminder (see Credit Crib Note: Taylor Morrison Home Corp 5-20-24), TMHC made its big expansion push with the acquisition of AV Homes in 2018 and William Lyon (announced 2019, closed Feb 2020). Those deals took TMHC into the upper tier of builders (note: you see the jump in revenue above and assets below from 2019 to 2020).

For the 2Q25 quarter, we see favorable volume trends in the East with closed homes higher and a decline in orders. For Central, closed homes also rose but orders declined more sharply. The West was “flattish” in closings but also down in orders. The TMHC metrics across regions is a reminder that the timing of community openings and the use of incentives and pricing strategies is still a “quarter-in, quarter-out” battle.

For the 2Q25 numbers in the most recent report, the East gross margins declined from 26.3% to 23.7% for the 3 months. The Central segment saw 2Q25 gross margins drop from 25.3% to 21.9%. The West held in better with segment gross margins rising from 20.8% to 23.1%. For six months, the East decline was more muted at 26.6% to 25.2% while the Central numbers saw a decline from 25.7% to 23.1%. The West weighed in with a rise in gross margins from 20.4% to 23.3%. In industry context, these are good margins and higher than the 2019-2021 levels at TMHC.

The above table updates the balance sheet history, and we see assets more than doubling from 2017 on the AV Homes and William Lyon acquisitions as well as on organic growth and steady investment that ran alongside the ZIRP years and a range of housing trends covered in other commentaries. The seasonal downtick of cash with the inventory build and buybacks is not significant at this point.

The above table breaks out some book value leverage metrics and asset coverage ratios we like to use to frame the relative balance sheet comfort zone in a slowdown. The ratio of owned inventory to net debt of 3.6x is solid and especially when you consider that any slowdown or defensiveness around inventory levels can drive house/lot liquidation and generate more cash flow. It also typically leads to slower growth plans or an outright decline in land spend and development outlays.

The total inventory to total homebuilder debt ratio of 3.4x is also quite strong even if nowhere near the much higher multiples seen with high BBB and low A tier builders. TMHC bonds trade more like a BBB tier corporate issuer than a BB for good reason.

The above table gives a simple view of some key cash flow lines with the main one for TMHC being its relative scale of buybacks across time since the last fiscal year before COVID. For some context on the rate of buybacks in 2025, TMHC indicates the company will buy back at least $350 mn in shares relative to an equity market cap of $6.0 billion (7-25-25). That is a relatively aggressive buyback at just under 6% of market cap (note: TMHC does not pay a dividend).

Housing sector:

New Home Sales June 2025: Mixed Bag 7-24-25

Existing Home Sales June 2025: The Math Still Doesn’t Work 7-23-25

Housing Starts June 2025: Single Family Slips, Multifamily Bounces 7-18-25

Homebuilders:

PulteGroup 2Q25: Still-Lofty Margins see a Mild Fade 7-23-25

D.R. Horton 3Q25: Material Slowdown Still Good Enough 7-22-25

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

See also:

Credit Snapshot: Ashtead Group 7-21-25

Footnotes & Flashbacks: Credit Markets 7-21-25

Footnotes & Flashbacks: State of Yields 7-20-25

Footnotes & Flashbacks: Asset Returns 7-20-25

Mini Market Lookback: Macro Muddle, Political Spin 7-19-25

Retail Sales Jun25: Staying Afloat 7-17-25

June 2025 Industrial Production: 2Q25 Growth, June Steady 7-16-25

CPI June 2025: Slow Flowthrough but Starting 7-15-25

Mini Market Lookback: Tariffs Run Amok, Part Deux 7-12-25

Mini Market Lookback: Bracing for Tariff Impact 7-5-25

Payrolls June 2025: Into the Weeds 7-3-25

Employment June 2025: A State and Local World 7-3-25

Asset Return Quilts for 2H24/1H25 7-1-25

JOLTS May 2025: Job Openings vs. Filling Openings 7-1-25

Midyear Excess Returns: Too little or just not losing? 7-1-25

• Pulte (PHM) continues to post some of the best gross margins in the peer group at 27%, down from the 2022 peak of 30% but still well ahead of pre-COVID levels. Average selling prices held in well in the upper quartile of the major public builders but net new orders faded with backlogs running lower as we have seen frequently with the major builders.

• PHM was quite clear it was planning for continued sector weakness and would slow land spend, reduce start rates, and focus on selling down excess spec inventory. That reflects the intrinsic working capital and operational flexibility that makes homebuilders safer in the credit realm than high fixed cost manufacturers or commodity-driven issuers.

• In terms of credit quality, Pulte still deserves to be moved up into the single A tier with NVR and D.R. Horton on the balance of its financial metrics, profitability performance, and balance sheet strength (see Credit Snapshot: PulteGroup 5-7-25, Credit Crib Note: PulteGroup 8-11-24).

The above chart frames price returns of PHM stock vs. Lennar for a useful comp given the very different strategies employed by Pulte vs. the #1 homebuilder based on revenue. We also include the S&P 500 for a broad market benchmark as well as the Homebuilder ETF (XHB) for the trailing 1-year period. The homebuilder pain set in during 4Q24 after a stretch of leading performance by the XHB over the trailing 1-year ending in Sept 2024.

The high margin focus of PHM contrasts with the “even-flow” and “price to sell” strategy used by Lennar to keep inventory turning and in theory maximizing cash flow for buybacks and helps manage supplier costs and relationships (see Lennar 2Q25: Bellwether Blues 6-20-25, Credit Snapshot: Lennar (LEN) 4-15-25, Credit Crib Note: Lennar Corp (LEN) 1-30-25). The idea is that keeps LEN cash flow cranking up. The high margin players such as Pulte and luxury homebuilder Toll Brothers have held in better in the stock market across this rough patch (see Credit Snapshot: Toll Brothers 5-5-25), so LEN’s long game approach has not won the short-term stock performance contest.

The above table updates the income statement trends for the most recent fiscal quarter ending in June (2Q25 for PHM). We are seeing revenue softening with PHM expecting more of the same market conditions ahead. PHM margins have been solid in peer group context at 27%, and PHM is guiding to 26% handle home sales gross margins for the 3Q25 and 4Q25 periods. The goal is to trim spec inventory down into a target range of 40% to 45% of production by year end from 47% at the end of 2Q25.

The wildcard will remain mortgage rates and the usual underlying variables debate that plays out on the screen each week (see Footnotes & Flashbacks: State of Yields 7-20-25). The yield curve anxiety around the Powell vs. Trump battles go beyond easing and lower short rates since disarray in the bond markets and the potential for Trump and Bessent to be on the wrong side of the tariff inflation debate would lead to UST curve steepening even with the front end easing. That would hit mortgage rates.

The above table updates the running weakness in volumes (closing and orders) with ASPs for PHM actually ticking higher in 2Q25 and YTD just as we saw in FY 2024. The 2Q25 ASP of $559K is in line with the $560K to $570K PHM expects in 3Q25 and 4Q25 and for the full year. The community count is expected to be 3% to 5% higher by year end.

Orders have faded in 2025, and that is not unusual in big builders reporting during 2025 as the backlogs broadly are running down. Some of the smaller public builders in growth mode are heading higher, but generally we see weakness in orders YoY as a common trend in 2025. As we cover in a segment closing chart further below, weakness in Florida and Texas, which are two massive housing markets, have not been offset by other regions even though the Midwest and Northeast performed well enough in 3Q25.

Among the items addressed on the earnings call, PHM continues to estimate a cost of $5,000 per unit for tariff costs in addition to incentive costs over 8% of gross sales vs. 6.3% in 2024. Both incentives and tariffs are still drags in 2025. In terms of tariffs, PHM sources around 20% to 25% of its lumber from Canada and the rest from the US. PHM cited the back half of 4Q25 for when tariffs would be hitting harder and continuing into 2026.

The segment earnings table above highlights the importance of Florida and the Southeast with Texas a high volume but lower earnings segment. Texas has by far the lowest ASP at $383K in 2Q25 while Florida was running at $551K. As is typically the case, the West at an ASP of $693K is a pricey segment but the Northeast leads in ASP at $770K for 2Q25 and $756K for 1H25. The West and Texas saw the steepest declines in YoY in new orders in the quarter.

The above table updates the closing volumes and the mix by regional segment with the Northeast by far the smallest and Florida the highest. West and Southeast are in the next tier. Among headwinds PHM cited was some softer performance from the move-up segment that carries higher margins.

The balance sheet of Pulte is exceptionally strong just based on the significant multiple of total debt seen in the inventory/debt ratio at 8.9x and the net debt % cap of 2.8%. Total homebuilding debt of $1.6 bn is dwarfed by the asset side of the equation. With higher margins and steady growth (PHM expects to grow by 5% to 10% longer term), that financial health in turn translates into an equity market cap of close to $22 bn. That is a favorable vote from the market proxy on very hefty asset coverage in the PHM credit story.

The cash flow generation strengths of the major builders and the aggressive capital allocation policies around buybacks is now “a given” for investors with the large public builders. Pulte is no different with its $1 billion-plus run rate YTD after $1.2 bn in 2024. In terms of cash flow deployment, during 1H25 PHM invested $2.5 bn in land acquisition and development and is on a path to $5 bn for the full year. PHM could see downward adjustments in 2H25.

Housing sector:

Housing Starts June 2025: Single Family Slips, Multifamily Bounces 7-18-25

New Home Sales May 2025: Slip and Slide 6-25-25

Existing Homes Sales May 2025: Sequential Stronger, YoY Weaker 6-23-25

Homebuilders:

D.R. Horton 3Q25: Material Slowdown Still Good Enough 7-22-25

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

See also:

Credit Snapshot: Ashtead Group 7-21-25

Footnotes & Flashbacks: Credit Markets 7-21-25

Footnotes & Flashbacks: State of Yields 7-20-25

Footnotes & Flashbacks: Asset Returns 7-20-25

Mini Market Lookback: Macro Muddle, Political Spin 7-19-25

Retail Sales Jun25: Staying Afloat 7-17-25

June 2025 Industrial Production: 2Q25 Growth, June Steady 7-16-25

CPI June 2025: Slow Flowthrough but Starting 7-15-25

Mini Market Lookback: Tariffs Run Amok, Part Deux 7-12-25

Mini Market Lookback: Bracing for Tariff Impact 7-5-25

Payrolls June 2025: Into the Weeds 7-3-25

Employment June 2025: A State and Local World 7-3-25

Asset Return Quilts for 2H24/1H25 7-1-25

JOLTS May 2025: Job Openings vs. Filling Openings 7-1-25

Midyear Excess Returns: Too little or just not losing? 7-1-25

• The market justifiably has been anxious about the housing cycle and homebuilder expectations, but a big week for major builder earnings is already demonstrating the financial resilience even in the face of high single digit declines in revenue. We had D.R. Horton and Pulte on the screen today with steady sequential margins, resilient cash flow and constructive guidance that eases some anxiety even if volume and pricing are down YoY for DHI.

• Closing volumes for the quarter beat the high end of guidance. Forward revenue guidance for FY 2025 was tightened and raised on the low end. Buybacks estimated for FY 2025 bumped higher from $4.0 bn to a range of $4.2 bn to $4.4 bn with dividend guidance flat at $500 mn. The capital allocation offers a fresh reminder of the exceptional cash flow fundamentals of the major builders.

• Orders were flat for the June quarter (3Q25) while home closings were down by -4.1% YoY. The homebuilding gross margin of 21.8% was flat sequentially but down YoY from 24.0%.

• Balance sheet liquidity and leverage remains extraordinary for a low A tier issuer with homebuilding inventory 12.5x net homebuilding debt. The stand-alone entities separate from the homebuilding operations are also stand-alone borrowers where the credit is not guaranteed by the homebuilding subsidiaries (see Credit Snapshot: D.R. Horton 4-28-25 , Credit Crib Note: D.R. Horton (DHI) 8-8-24, D.R. Horton: Credit Profile 4-4-23). That adds some extra asset protection value to the DHI bond story, but the consolidated leverage is quite low regardless.

• This week will also see other major builder earnings and more signals on the housing markets from NVR, Taylor Morrison (TMHC), Meritage (MTH), M/I Homes (MHO), and Century Communities (CCS).

The above stock price return series frames the punishing stock price action for the homebuilders after leading the trailing 1-year return through the end of Sept 2024. As national scale bellwethers and industry leaders, DHI and LEN served as a housing sector proxy and underperformed the broader market and Homebuilder ETF (XHB), which also includes some major suppliers.

We cover the key drivers in our housing sector and single name research (see links at bottom), so we won’t revisit much of that here. In a “price x volume” business, volumes have been going the wrong way but pricing is also now struggling. The mix asterisk (region, product tier) is intrinsic to any time series on average selling prices, but the pressure has been forming for a while now.

The worry over a flagging consumer has been a recurring theme despite some constructive data points such as retail sales last week. Stubbornly high mortgage rates, materially higher home prices vs. that seen in the pre-COVID period are among the easy items to check off as drivers of the revaluation of homebuilder equities. Affordability strain remains a constant.

From a credit quality vantage point, however, the credit profile of the builders remains very much intact with strong balance sheets, exceptional asset coverage, and cash flow fundamentals that arguably deserve higher ratings even if the housing cycle keeps turning down.

The above table updates a cross-section of key financial and operating metrics. We see volumes and average selling prices lower in 2025. DHI has one of the lowest ASPs among the major builders (see Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25).

Gross margins in 3Q25 (June quarter for DHI with its Sept FY) came in better than expected despite all the challenges and remains above pre-COVID levels even if well down from the post-COVID peak of 2022 (28.7%). Orders and backlog are down through 9M ended 6-30-25 even if orders flattened out in 3Q25 vs. 3Q24.

The above table updates the “consolidating” segment disclosure across the various DHI business lines including Forestar (land and lot development), rental building operations (single family and multifamily), and financial services. Separate from this disclosure is the geographic segment details for the homebuilding operations, but that awaits the 10Q. The business line segment disclosure above show how all business units have seen declining pretax earnings in 2025.

Volume has been going the wrong way for the industry as well as DHI, and we see 3 of 6 geographic segments moving lower to an overall decline on total closings. Some regions have been more resilient than others.

The above table updates the key balance sheet lines and underscores the solid liquidity and substantial excess asset coverage even just looking at inventory lines vs. total debt. DHI’s market cap is in excess of $40 billion and compares favorably relative to DHI’s low net debt and total debt numbers.

We highlight that the non-homebuilding debt is not guaranteed by the same homebuilding subsidiaries that are guarantors for the homebuilding debt/bonds. Each of the other business line units – Rental, Forestar, Financial Services – are stand-alone credits that support their own debt.

The above table updates the operating cash flow data along with some of the major moving parts of the working capital lines and capital allocation trends. We see the impressive level of stock buybacks and dividends. The stand-alone cash flow of the homebuilding operations is also highlighted at the bottom of the table. That massive base of free cash flow helps bondholders sleep at night even if the market faces a more notable downturn as inventory gets liquidated and translates into cash flow generation.

Housing sector:

Housing Starts June 2025: Single Family Slips, Multifamily Bounces 7-18-25

New Home Sales May 2025: Slip and Slide 6-25-25

Existing Homes Sales May 2025: Sequential Stronger, YoY Weaker 6-23-25

Homebuilders:

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

See also:

Credit Snapshot: Ashtead Group 7-21-25

Footnotes & Flashbacks: Credit Markets 7-21-25

Footnotes & Flashbacks: State of Yields 7-20-25

Footnotes & Flashbacks: Asset Returns 7-20-25

Mini Market Lookback: Macro Muddle, Political Spin 7-19-25

Retail Sales Jun25: Staying Afloat 7-17-25

June 2025 Industrial Production: 2Q25 Growth, June Steady 7-16-25

CPI June 2025: Slow Flowthrough but Starting 7-15-25

Mini Market Lookback: Tariffs Run Amok, Part Deux 7-12-25

Mini Market Lookback: Bracing for Tariff Impact 7-5-25

Payrolls June 2025: Into the Weeds 7-3-25

Employment June 2025: A State and Local World 7-3-25

Asset Return Quilts for 2H24/1H25 7-1-25

JOLTS May 2025: Job Openings vs. Filling Openings 7-1-25

Midyear Excess Returns: Too little or just not losing? 7-1-25

Credit Trend: Stable

Summary Credit Profile:

We have always been very comfortable with Ashtead credit quality since its BB tier days when it was a 2L bond issuer. Since those days, the #2 equipment leasing company continues its slow and steady rise up the credit tiers into IG with BBB3 composite credit ratings and an unsecured bond stack (only the ABL line is secured). Those credit ratings could easily be higher based on low leverage, impressive financial flexibility (notably in capex) and free cash flow generating ability, a stellar track record across multiple cycles including two crisis backdrops, and low overall business risk.

The favorable credit attributes are intertwined with intrinsic capital allocation flexibility of gross capex vs. net capex after sales of equipment and fleet management actions. The high EBITDA margins and favorable secular demand for leasing in the “lease vs. buy” decision has allowed Ashtead to grow faster than the equipment markets across the decades. The healthy free cash flow has been tested across some very extreme cyclical moves the past 25 years including a credit crisis and a pandemic. Ashtead pushed right through those cycles and kept on expanding.

The best comp for the overall credit story is industry leader United Rentals (see Credit Snapshot: United Rentals 4-1-25, Credit Crib Note: United Rentals 11-14-24) with the main differences between the two being URI’s much more aggressive, big-ticket acquisitions over the years than what was seen at Ashtead (Credit Crib Note: Ashtead Group plc 11-21-24). The distant #3 player making a push to close the gap is Herc Holdings (HRI), but HRI falls well short of Ashtead (Sunbelt) in scale and breadth of operations. HRI is materially riskier than United Rentals and Ashtead in credit quality as it makes a debt-financed push into transformative acquisitions (see Credit Snapshot: Herc Holdings 4-23-25, Credit Crib Note: Herc Rentals 12-6-24).

Relative Value:

Ashtead has 9 unsecured bonds in the BBB tier of the IG index that generally trades wide to the BBB tier industrial composite, so it has been a good credit value relative to BBB tier issuers with greater cash flow volatility and those that evidence more exposure to a high fixed cost base serving cyclical end markets. That includes autos and cap goods and multi-industry manufacturing issuers.

Ashtead presents lower business risk than companies with high commodity-based exposure (metals/mining, upstream oil and gas) and issuers that lack the demonstrated flexibility of Ashtead to make rapid adjustments during cyclical turns or a shifting macro backdrop. Numerous companies and industrial subsectors have materially lower profit margins, weaker balance sheets, and less cash flow resilience than Ashtead.

Some companies remain better known in the IG market, but Ashtead will get better name recognition as it keeps growing and changes its listing to the NYSE. Ashtead equity has returned almost 7x the S&P 500 since the start of 2006 and doubled the S&P 500 the past 10 years.

Business Risk:

We consider the business risk profile of the equipment leasing companies as low given the short lead time in fleet expansion (new equipment orders) or reduction (selling used equipment). The intrinsic cash flow resilience of the business is bolstered by some supportive attributes: broadly diversified exposure by region, location clusters generating a competitive edge in a highly fragmented industry (Ashtead cited 3600 rental companies), an extraordinarily diverse range of equipment types serving construction markets, and a wide range of industry verticals outside the core construction markets. The very broad array of individual customers minimizes counterparty risk.

Ashtead is the #2 player in an industry that demonstrated secular growth in equipment leasing vs. owning. The increasing complexity of equipment and challenges staffing personnel with the proper skill sets adds to the cost of ownership for its customers. Operational flexibility for customers is improved by leasing as equipment problems are immediately resolved and major mechanical problems quickly addressed whether equipment is replaced or repaired.

The branch geographic clustering strategy supports service quality and cross-selling strategies and especially with longer term mega projects. Equipment leasing consolidation has created an industry structure where the Big 2 (United Rentals and Ashtead) comprise over a quarter of the North American market.

Tariffs:

The primary threat from tariffs is the cost of capital goods equipment as prices could rise from material costs (steel, aluminum, copper, etc.) even if made in the US. Of course, tariffs on a wide range of equipment sold by US trading partners will also cost more to a US buyer. The blanket tariffs on entire nations and trading blocs, and the components used in manufacturing equipment could undermine demand if end market weakness and costs migrate higher.

The silver lining on equipment costs is that a potential customer might see equipment pricing as one more reason to look to leasing for their equipment needs in the “buy vs. own” decision process. That said, the tax bill offers incentives on capex with the trade-off being the use of balance sheet capacity or current cash flow that might not fit into financial planning – notably for small business lines.

The North American and US-centric operations offer some shelter from the supplier chain chaos. The UK operation is at least outside the EU trade clash risk. The more macro-based risk from tariffs is the fear of cyclical pressure on consumers and industries from tariff fallout and threats of economic contraction in fixed asset investment or stagflation that would dial back mega projects or undermine the reshoring theme. Impaired trade flows into the US for equipment also could have the effect of sustaining a robust used equipment market.

Profitability:

As highlighted in the charts below, Ashtead boasts extremely high EBITDA margins in the mid to upper 40% range for equipment rentals across the cycles. While those margins come with an asterisk for reinvestment needs to sustain the cash flow and revenue growth via replacement capex, the margins remain impressive after any historical and theoretical replacement capex. The high margins allow ample room for growth capex and shareholder enhancement from free cash flow. Ashtead has multiple pathways to sustain high margins as well as growth via bolt-on acquisitions and sustained growth capex.

The growth has been very strong across the post-COVID cycle with stimulus and a wide range of infrastructure programs and targeted project development with fiscal support (notably EVs, alternative energy) driving multiyear megaprojects with extensive equipment needs. Some projects such as power, LNG, semis, and data centers will have longer tails than others that are getting dialed back (EVs). Key drivers of secular growth include expansion of specialty equipment while general tools remain an anchor for revenue and cash flow.

We have looked at these moving parts in our commentaries on United Rentals as the industry leader along with Ashtead and Herc. Those three are expected to control as much as 50% of the market in the future. The lead players have also cited pricing and fleet size discipline as a strength. The nonresidential real estate and industrial verticals are extensively covered on conference calls and the same for construction market macro data, but the growth is tailing off as we saw in 4Q25 and FY 2025 capex guidance for spending in FY 2026.

Revenue and profitability are steady, but the next leg up in revenues awaits clarity on the pace of some fading mega projects (e.g. EVs) and to what extent those are offset in other major categories (data centers, government infrastructure, reshoring and onshoring). Bolt-on acquisitions are the more obvious path to growth if organic growth slows down.

Balance Sheet:

The basic realities of high EBITDA margins and steadily growing revenue is that the growth allows Ashtead (like URI) to keep growing both sides of its balance sheet while keeping leverage very low on an historical basis and relative to EV multiple valuations. That is a very attractive luxury for bondholders and shareholders alike in preserving credit quality while rewarding shareholders.

The high EBITDA run rates, high margins, and healthy free cash flow also allow Ashtead to shift capital allocation strategies over to bolt-on acquisitions and buybacks when less growth capex is more appropriate. Tapping the brakes is where Ashtead is now as fiscal 2026 unfolds. Typically, with Ashtead and United Rentals we see redeployments of discretionary cash flow in such markets to share buybacks and tactical acquisitions. We saw that in 2020-2021 as detailed in the charts. Then the post-COVID boom kicked in and the array of “mega projects” drove soaring rental capex in FY 2023 (note: FY 2023 with April 30 FY is mostly calendar 2022) and FY 2024.

SELECT TABLES

Rental revenue in a temporary plateau, margins steady.

Historical segment format shows growth, segment margins down from peak.

New segment format adopted in 2025 reflects equipment categories.

Capex planning and free cash flow drive shareholder rewards as swing factor.

Very strong balance relative to free cash flow, capex flex, and EV multiples.

DISCLAIMER

As disclaimers always say, these are just our opinions, and we are not giving anyone investment advice nor do we consider the application to their unique or distinctive portfolio needs or risk appetites. We use what we believe to be reliable sources from company reports, financial filings, event webcasts, and transcripts among other information sources. We routinely read and consult reputable industry and trade literature. We consult a range of data sources on bond prices including those that detail recent trades. When considering the impact of tariffs, we can assure you that we do not rely on Donald Trump. We actually know “the buyer pays.”