In at the moment’s atmosphere of elevated geopolitical tensions, elevated inflation ranges, and falling inventory markets, discovering an funding immune from a cyclical downturn and probably diminished discretionary spending ranges is sort of Difficult.
Blue Bird Corporation (NASDAQ:BLBD) is a superb worth story in these tough instances. BLBD is a frontrunner within the US faculty Bus market, an business with a CAGR forecast of 10% (ACT forecast quoted by BLBD Q3 earnings) within the coming years as an growing old bus fleet is changed. A $5 billion US government clear bus program is driving a conversion to electrical faculty buses the place BLBD has a market-leading presence.
A two-year turnaround plan at BLBD has delivered a high-margin, extremely environment friendly producer with important progress potential. The highest quantity various gasoline faculty bus producer seems to be set for progress unparalleled in its 80-year historical past.
Wall Street and the SA Quant system fee Blue Bird as a powerful purchase. Blue Bird has a sustainable aggressive benefit with a newly energized workforce, making the business a superb countercyclical funding, a real worth inventory.
The Turnaround
From 2018 to 2021, Blue Bird appeared to spiral downward; gross sales income fell, and earnings almost disappeared.
Blue Bird was hit exhausting by the pandemic, as faculty classes moved on-line and college buses have been put in storage. Buses have been neither correctly maintained nor changed, decimating Blue Bird components and new automobile gross sales.
The pandemic diminished demand and led to produce constraints in most industries. The Backlog at BLBD crept as much as 4,200 models in Oct 2021, not due to elevated orders however as a result of they may not produce automobiles being unable to supply essential parts. BLBD reported minimal cancellations as a result of delays and stated 2,000 bus gross sales have been deferred into 2022 (FY 2022).
When the pandemic ended, provide chain points continued, and the cost of inbound supplies rose. The pre-pandemic backlog was nonetheless on the order ebook at mounted costs, and gross margins have been worn out, resulting in the -$44 million EBIT in 2022.
Blue Bird the Turnaround
BLBD has emerged from the trauma of the pandemic as a lean and environment friendly producer with market-leading, high-margin merchandise in an business primed for important progress. Management has reworked the business by concentrating on margins, manufacturing efficiencies, and employees.
Margins
Increasing margins shouldn’t be easy; by 2022, gross margins had dropped to 4.6%, turning money move to the corporate damaging and unsustainable. 2023 margins are coming in round 16% (Q3 earnings name), an astonishing turnaround. BLBD has achieved this by implementing a number of key methods.
The first and most blatant was to extend costs. It is simple to say however not at all times straightforward to do. From 2021 to 2023, sale costs elevated by 25%, and 2024 fashions have an additional $2,500 per bus improve. New contracts have worth escalation clauses to cowl modifications to uncooked supplies. Despite the value will increase, gross sales quantity is up over the interval, and BLBD now has a backlog of 5,000 models, almost all of that are on the new larger worth factors (slide 17 of the Q3 earnings presentation). This backlog is because of elevated orders, not a scarcity of manufacturing.
Workforce modifications to drive effectivity
An almost full change in senior administration was enacted in 2021 (FY 2022); the brand new administration has labored to enhance worker relations and redesign working practices and manufacturing unit format. Total headcount has been diminished from 2,300 in 2020 to 1,600 at the moment, a drop of 30% whereas on the similar time growing manufacturing.
BLBD managed this modification in workforce fastidiously, and staff have acquired important enhancements in phrases and circumstances, together with further paid holidays, pay raises, and improved advantages. The workforce voted to unionize final yr, growing their sense of job safety. BLBD now works carefully and transparently with the United Steel Union. (Q3 2023)
The modifications have had a dramatic impact; it now takes 20 days from beginning a build to reserving; it used to take 40 days. (Q3 2023)
Market Changes driving the product combine.
After the pandemic, most faculties have returned to face-to-face studying. BLBD has seen a lift to its spare components business as buses return into operation, and with an growing old fleet, new orders are arriving with some urgency. This spending shouldn’t be discretionary; the buses should be changed, and the market might be way more sturdy and predictable than many others.
The marketplace for School Buses is Transitioning to cleaner fuels
Diesel is being changed because the dominant gasoline by CNG and electrical energy. BLBD gave the next steering (P23 slide present)
EVs are the very best margin and highest priced of the three choices, with diesel being the bottom priced lowest margin product. Alternative fuels are an space wherein BLBD has had specific success. They declare a 60% market share of the choice fuels market, and solely they and Thomas Built Buses at the moment provide a CNG model. Blue Bird has produced 20,000 CNG buses utilizing a Ford engine and ROUSH CleanTech low-pressure system. In the Q3 earnings name 2023, the connection with Ford and Rousch was described as unique. CNG lowers gasoline costs by around 50% in comparison with diesel and has fewer emissions.
Cummins offers {the electrical} drive practice via its Accelera model title. The cope with Accelera seems to be unique, though I might discover no proof of this. Blue Bird is featured on the Accelera website, and not one of the BLBD rivals use the Accelera merchandise. Cummins is a superb accomplice on this area, having in depth electrical engine expertise and a Hydrogen Fuel cell division for the longer term. The Cummins deal could also be a supply of a sustainable aggressive benefit, Blue Bird’s largest competitor could have an issue on this space. (dialogue beneath of Thomas Built Buses)
BLBD has produced extra various gasoline buses than the remainder of the business mixed. (FY 2022 CEO)
EV Production
Fuel represents probably the most important cost for School bus operators, and that worth seems to be to be growing. A basic consciousness about air air pollution and the consequences of automobile emissions on local weather change are all driving a transfer in direction of the electrification of the college bus fleet. Electric buses scale back upkeep prices by as a lot as 80% and scale back the entire cost of possession. The vary anxiousness that seems to have halted the adoption of battery-electric heavy-duty vans shouldn’t be as essential in class buses as they have a tendency to not cowl important distances every day.
The US authorities has launched a number of plans that give incentives to assist states and faculties transfer to electrical automobiles. In 2022, a bi-partisan $5 billion dollar scheme was launched to exchange present diesel buses with zero-emission ones.
The scheme will award $1 billion in grants yearly from 2022-2026. The 2022 awards have been introduced, and BLBD did exceptionally nicely. Using the revealed knowledge, I forecast the next gross sales for the 2022 spherical. (I might determine the provider of 790 of the awarded buses from the revealed checklist after which assumed the % can be legitimate for the opposite awards the place I couldn’t discover the producer.)
Blue Bird has the biggest market share, adopted carefully by Thomas Built Buses wholly owned subsidiary of Daimler Truck (OTCPK:DTRUY), Lion Electric (LEV:CA), and Navistar (generally known as IC Bus).
Competitive evaluation of the totally different buses
The buses are all fairly comparable; Thomas Built makes use of the Proterra Inc. (OTC:PTRAQ) energy practice. Proterra shocked the business in August when it filed for Bankruptcy, lined on this article by the wonderful analyst Henrik Alex. We must wait to see how Thomas Built is affected. The mum or dad firm of Thomas Built Daimler Trucks North America could become involved by shopping for a few of Proterra or supplying a brand new energy practice.
I checked out Lion Electric on this article and thought of them a purchase.
Likely, the standard of the supplier channel, established service facilities, and earned belief ranges allowed BLBD and Thomas Built to amass the biggest market share. The issues with Proterra could push extra orders in direction of BLBD sooner or later; nevertheless, within the Q3 2023 earnings, the CEO stated he hoped to realize a little bit greater than 25% of future awards, which might agree with my earlier evaluation.
This authorities initiative ought to ship greater than 700 EV faculty Bus orders to BLBD yearly for the subsequent 5 years, a transformative repeat order.
In the Q3 2023 earnings name, the CEO stated that BLBD now had 550 EVs within the backlog, and deliveries have been up 50% yr on yr. BLBD continues to spend money on its EV manufacturing upgrading services at its new EV manufacturing middle. Alternative gasoline buses have been 63% of unit gross sales within the quarter. “We proceed to be the clear chief on this area. No different producer comes shut to those numbers.” stated the CEO.
To additional emphasize the transition, Britton Smith was appointed firm president; Britton led the EV aspect for the earlier 18 months.
A 40,000 sqft building has been transformed for EV chassis meeting, and capability has elevated from 2 models per shift to 4 with the expectation that they may transfer to six buses per shift later within the yr. A double shift would give a capability in extra of 5,000 models per yr. A possible second marketplace for these automobiles has been recognized, promoting business strip chassis for last-mile supply; they need to be with clients someday within the subsequent six months.(Q3 2023 transcript)
The new efficiencies and altering product combine make a fabric distinction to BLBD working figures. In the q3 earnings, the next statistics have been launched.
Unit gross sales up 24% yr on yr
Net income of $88 million, 43% larger than final yr
Free money move of $43 million was $83 million larger than the earlier yr’s outflow
Average income per bus elevated 17% to $126,000
The gross margin throughout the business was 15%
EPS was $0.44, up from -$0.09 final yr.
Valuation
The SA Quant system has rated BLBD a powerful purchase since April 2023, inserting it third out of 42 in its business. Most SA readers will pay attention to the Quant system’s predictive means. In BLBD, we now have a mixture of the Quant system utilizing historic knowledge to make a optimistic prediction mixed with a transparent business case for growing earnings and returns.
Wall road additionally offers it a powerful purchase with six analysts overlaying the inventory.
The six analysts give a median one-year worth goal of $27.58, a rise of almost 50% from at the moment’s worth, and they’re extremely correlated with solely a 15% distinction between targets.
The similar analysts give an annual forecast earnings progress of 92%, giving an EPS goal of $2 in 2025 from its damaging $1.66 on the finish of 2022.
Using administration steering, I’ve constructed a 3-statement. The medium-term forecast for income is lower than that offered by the administration steering, and margins are barely tighter than the steering. I’m not sure if will probably be doable to keep up their 28% EV market share and maintain the identical excessive margins. There might be different entrants to this area, which can inevitably have some impression.
The mannequin results in a good worth of $31.50, almost 70% larger than its present valuation.
BLBD is 14% owned by most people and 84% owned by establishments/funding corporations, and the share worth is up 150% within the final yr; nevertheless, it has fallen from its June excessive of $28.
There has not been significant dilution within the final yr. However, a number of the most vital shareholders have taken benefit of the 100% share worth improve to ebook some earnings on their funding.
American Securities stays the biggest single shareholder with 20% of the inventory.
Finances and Risks
As mentioned, BLBD has had a number of tough years, and the steadiness sheet nonetheless displays this.
Short-term belongings don’t cowl short-term liabilities; shareholder fairness (Total belongings – Total Liabilities) is barely $10 million. Debt is $135 million, giving a debt-to-equity ratio of 1,292%. EBIT doesn’t cowl curiosity funds, however that is higher than the damaging fairness state of affairs of 2021.
Blue Bird will want the EPA faculty bus program to run its full 5 years and to keep up its high-margin product combine, enabling it to proceed producing optimistic money move because it improves its monetary position. With solely $136 million of available liquidity, curiosity funds of $15 million each year, and working prices within the area of $100 million, the corporate has little room for error. The business is on a superb path however doesn’t have the luxurious of having the ability to afford many setbacks.
Conclusion
BLBD is a market chief in a longtime business getting into a progress stage. The progress is because of pent-up demand attributable to delayed selections throughout the pandemic, a major authorities incentive scheme to transition to zero-emission buses, and an ongoing must update the nation’s growing old fleet of college buses.
The various gasoline School Bus market is a high-margin sector the place BLBD has a major and sustainable benefit with wonderful merchandise and the help of main energy practice suppliers Cummins and Ford. The competitors makes use of much less well-known drive-train suppliers, and Blue Bird’s largest competitor makes use of an influence practice from a bankrupt provider.
BLBD has a big backlog of orders at newer, larger worth factors and is within the course of of accelerating manufacturing capability.
The business for varsity buses is unlikely to be affected by any slowdown in client spending or any fallout from the present geopolitical occasions unfolding.
BLBD represents a superb countercyclical funding and appears to be wonderful worth.
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