BLBD - Blue Bird: Buy This Hidden EV Gem Before The Trade Gets Crowded

2023-12-13 07:00:00 ET

Summary

• Blue Bird reported strong fourth quarter earnings, with record profitability and significant increases in unit sales, net revenue, and adjusted EBITDA.
• The company's backlog now consists of orders at new pricing levels, which will improve profit margins in the coming quarters.
• Blue Bird's position as the market leader in electric school bus adoption and the favorable regulatory environment towards EVs paint a promising picture.
• In this analysis, I will update my thesis for the company - published last July - with new data.

Last July, after evaluating the progress of Blue Bird Corporation's ( BLBD ) turnaround strategy, I struck a bullish stance on BLBD stock. After digesting the fourth-quarter earnings report , Mr. Market sent BLBD stock 10% higher yesterday, which did not surprise me as Q4 earnings highlight Blue Bird's continued progress toward profitable growth. Building on the findings from my previous research (please refer to the linked article above) and the recent financial performance, I am maintaining my buy rating for BLBD.

Fourth-Quarter Earnings Highlight Continued Progress

Blue Bird, building on the momentum in Fiscal 2023, reported strong numbers for the fourth quarter. The highlight for the fourth quarter was the record profitability. The fourth quarter marked a record profit for any quarter in Blue Bird's history, with the company reporting net income of $18.6 million. The adjusted EBITDA margin hit a high of 13% in Q4, enabling this stellar performance.

Below are some of the financial highlights for Fiscal 2023.

• Unit sales increased by 25%, with the company selling over 8,500 buses.
• Net revenue reached $1.13 billion, a 41% increase from the previous year.
• Adjusted EBITDA hit a record $88 million, a substantial improvement of $103 million over the previous year.
• Adjusted free cash flow for the year was $121 million, a significant increase of $144 million compared to the prior year.

Blue Bird registered double-digit YoY revenue growth in each quarter of Fiscal 2023, leaving investors in no doubt about its solid progress in turning things around. Even more importantly, the company has been able to break through to profitability once again.

Source: Seeking Alpha

In the fourth quarter, part sales also set a record high with revenue from this segment inching closer to $100 million, a whopping 27% YoY growth.

Exhibit 1: Financial performance highlights

Looking ahead, the company now projects revenue of $1.15 billion to $1.25 billion in Fiscal 2024, and adjusted EBITDA of $105 million to $125 million at a margin of around 10%. All these numbers represent an improvement from the previous guidance, which highlights the growing confidence of the management team in exceeding previously stated turnaround goals.

The Prospects Look Bright

In my previous article, I highlighted a few reasons why Blue Bird is well-positioned to grow. These include the company's market dominance in Type C and Type D school buses, the improving operating performance, the growing EV backlog, and the favorable regulatory environment toward EV school buses. I am not planning to discuss these expectations in this analysis. Instead, I will build on the thesis based on new data.

First, Blue Bird's profit margins are poised to improve in the coming quarters as the company's backlog now consists of orders at new pricing levels. Legacy-priced units - those at contractual prices agreed before October 2021 - hurt the company's profitability through the first quarter of Fiscal 2023. As revealed by the company management during the Q4 earnings call , every bus in the backlog now reflects current pricing. This is a major positive development, in my opinion, as it allows the company's margins to expand with the current pricing strategy being more competitive and value accretive to shareholders.

Blue Bird CEO Phil Horlock said:

Every bus in our order backlog now reflects current pricing, and we're priced competitively, which you can tell from our quote win rate and incoming orders. This is an entirely different Blue Bird bus revenue structure compared with a year ago.

Blue Bird's backlog now consists of 600 EVs, which does not come as a surprise as the EPA's Clean School Bus Program has distributed $1 billion to 389 school districts to support the transition to low-emission school buses. The program plans to disburse another $4 billion in funding through 2026, which should accelerate the demand for electric school buses in the next few years.

In total, Blue Bird's backlog now represents revenue of over $670 million.

A bird's eye view of the electric school bus landscape in the U.S. reveals Blue Bird still has a long runway to grow. According to data compiled by the World Resources Institute, there are 1,836 electric school buses in the U.S. today, which represents only 0.4% of the U.S. school bus fleet. An additional 3,000+ electric school buses are being manufactured to be delivered to school districts in the coming years but there is a substantial shortage of EV buses to meet the nation's clean energy goals by 2030.

Exhibit 2: Electric school bus statistics

Blue Bird, as the nation's leading school bus manufacturer and the market leader in EV adoption, will play a key role in helping the government's plans to promote alternative energy school buses.

The improving operational performance, which was evident throughout Fiscal 2023, paints a promising picture of what the next couple of years holds for Blue Bird. The adjusted EBITDA walk from FY2022 to FY2023 reveals that the notable improvement in EBITDA was driven by structural developments.

1. Favorable pricing and the growing contribution from EVs played the biggest part in EBITDA growth.
2. The company's shift to higher-margin products paid off well.
3. Efficiency improvements and operating leverage drove margins higher.

Exhibit 3: Adjusted EBITDA walk from FY2022 to FY2023

Blue Bird's fundamentals are improving, notably. As we move forward, I believe the positive impact of the changing product mix will be even more pronounced, enabling the company to convert revenue growth into profits.

In FY2024, a bright spot for Blue Bird will emerge in the form of improved supply chain operations. On the Q4 earnings call, the company mentioned that supply-chain constraints improved but continued to have an impact on production. Blue Bird is actively engaged with suppliers facing constraints, providing on-site support at their plants. This suggests a proactive approach to addressing supply chain challenges, indicating that the company is working closely with its suppliers to mitigate any disruptions. In FY2024, I believe many of these constraints will ease notably as we continue to see improvements in supply-chain bottlenecks around the world. Blue Bird, therefore, will have more wiggle room to focus on growth instead of managing supply-chain constraints.

Backed by improving numbers, I am growing in confidence that Blue Bird is moving in the right direction.

Takeaway

Blue Bird had a fantastic fourth quarter. The company delivered on all fronts and boosted the guidance for the upcoming financial year. Buoyed by the favorable outlook for electric school bus adoption and Blue Bird's market-leading efforts in this space, I expect BLBD to attract premium valuation multiples in the future as the company emerges as a large-scale EV manufacturer. At a forward P/E multiple of around 16, Blue Bird's earnings yield of over 6% seems like a sufficient reward to remain invested in the company.

For further details see: