Investment Thesis
Blue Bird Corporation’s (NASDAQ:BLBD) profits is poised to gain from raised stockpile levels and greater prices on that stockpile in the coming quarters. Additionally, the business needs to see gains from the Environmental Protection Agency (EPA) tidy school buses refund program and increased replacement need for the aging nationwide school bus fleet in the near and long term. In regards to margins, lower input expenses and the execution of a higher-priced stockpile ought to be a near-term tailwind. In the medium to long term, an increased mix of higher-margin EV and alternative fuel school buses due to the EPA refund program ought to enhance margins. The business’s appraisal is likewise affordable. So, I have a buy score on the stock.
Revenue Analysis & Outlook
Following the pandemic, BLBD experienced a decrease in need, which was consequently intensified by supply chain problems and element unavailability. However, as the supply chain has actually started to alleviate, the business has actually begun to see advantages.
In 1Q23, the business reported an excellent 82.4% year-over-year boost in profits, which reached $236 million. Bus sales profits grew 89.4% year-over-year, while parts sales profits increased by 33.9% year-over-year. The strong development in profits was mainly driven by enhancements in the supply chain, leading to much better execution of raised stockpile levels. During this quarter, the business provided 1,957 buses, representing a 70.4% year-over-year boost. Pricing likewise contributed 11.4% year-over-year to the business’s profits development.
Looking ahead, I anticipate the robust profits development momentum to continue in the coming quarter, with take advantage of much better stockpile conversion into profits, greater prices on stockpile orders, and Federal financing for the electrification of school buses.
After experiencing a decrease in need throughout the lockdown, the business saw some need healing when schools resumed. However, it dealt with supply chain problems beginning in the 2nd half of FY21. These supply chain problems affected the business’s capability to source crucial elements and led to a lower conversion of the stockpile. As an outcome, the business’s stockpile increased from 1,344 systems in FY19 (pre-pandemic level) to over 5,300 systems in 1Q23. The advantage is these supply chain problems are now relieving, which ought to increase the stockpile conversion rate and help profits development.
Further, over the last 18 months, the business has actually executed different rate boosts to balance out greater input expenses. These higher-priced orders are now in stockpile and are yet to be provided. On a year-over-year basis, the business’s stockpile ASP is up 22%. So, in addition to system development, the business needs to likewise benefit meaningfully from pricing development.
In addition to raised stockpile levels, the business needs to likewise gain from the Infrastructure Investment and Jobs Act (IIJA) financing. The just recently enacted IIJA assigns $5 billion to help regional school jurisdictions purchase no and low-emission buses from 2022 to 2026. In October 2022, the Environmental Protection Agency (EPA) revealed awarding of roughly $913 million from IIJA as part of the 2022 Clean School Bus Rebate Program, with 95% of the granting going towards EV school buses. The business began to see orders from the EPA’s tidy school bus refund program in 1Q23, with the biggest volume of EV orders originating from clients in the states of Nevada, Kentucky, Tennessee, and Utah. Management anticipates an overall of 500-700 brand-new EV buses or $200 million worth of incremental orders in the coming couple of quarters from the financing already dispersed to schools. Overall, management anticipates an overall of $1 billion of incremental profits for the business from this refund program in the coming years.
Furthermore, in the long run, the business’s profits ought to gain from the aging nationwide school bus fleet. As schools started to resume in FY22, the market saw strong need for school buses. Currently, roughly 43% of the current nationwide school bus fleet is ten years or older and is anticipated to be changed in the coming years. I think that the replacement need for these school buses ought to continue to benefit the business.
In addition to near and long-lasting profits drivers, I like the business’s existence in the school bus market, which tends to be resistant throughout an economic crisis.
Margin Analysis & Outlook
Following the pandemic, BLBD’s margins were affected by volume deleveraging and subsequent boosts in input expenses. The business normally takes orders at set rates and recognizes these orders at a later date in earnings upon shipment. Any boost in input expenses in between the date of order reservation and shipment is normally borne by the business. Hence, due to the increase in steel rates and other input expenses in 2021 and early 2022, the business experienced substantial margin pressure for the last 2 years. Although input expenses were supporting in early 2022, the Russia-Ukraine war reignited input cost inflation, leading to a postponed effect on the business’s margins in 4Q22 and 1Q23.
Looking ahead, I think the business’s margins ought to recuperate sequentially throughout the year with the advantages of lower input expenses and conversion of the higher-priced stockpile. Moreover, the mix shift towards higher-margin EV buses due to the EPA refund program ought to likewise benefit margins in the long run.
After a short uptick when the Russia-Ukraine war began, steel rates supported once again in the latter half of 2022. The postponed result of the rate decrease ought to stream through the P&L in the next couple of quarters when lower COGS connected to these orders are acknowledged. Moreover, throughout the last 18 months, the business has actually been increasing rates to balance out input cost inflation. These higher-priced orders are now in the stockpile. As these higher-priced stockpiles are transformed into profits with lower recognized input expenses, the business needs to witness margin growth in the coming couple of quarters.
Furthermore, orders from the current EPA tidy school bus refund program ought to move the business’s profits mix towards higher-margin EV and alternative fuel school buses. The business provided 123 and 269 EV school buses in 2021 and 2022, respectively. In 1Q23 alone, the business provided 92 EV school buses, which was up 130% versus the previous year. The momentum needs to continue, and the business needs to witness a considerable boost in need for EV and alternative fuel school bus sales in the near and long term, leading to a mix shift towards higher-margin buses.
Valuation & Conclusion
A great deal of things have actually failed for the business over the last number of years, which have actually affected the business’s earnings and depressed its margins. As an outcome, the business is anticipated to publish simply $0.28 in EPS for FY23 (ending September) and its P/E on these revenues is 68.61x. However, as the business’s business recuperates over the next number of years, it is anticipated to publish a sharp healing in its revenues and its P/E on FY24 and FY25 EPS is 13.92x and 8.64x, respectively.
I discover the business’s forward P/E on FY24 and FY25 revenues affordable. This combined with its appealing near and long-lasting potential customers makes BLBD equip a bargain.