SHYF - The Shyft Group: Right Time To Invest

2023-05-25 09:29:09 ET

Summary

• SHYF posted its Q1 FY23 results with improved sales and gross margins.
• They are expanding their business in Tennessee to boost revenue growth.
• The stock has corrected 30% in the last four months, and I think it is a great buying opportunity.
• I assign a buy rating on SHYF.

The Shyft Group (SHYF) manufactures specialty vehicles for recreational vehicle industries globally. They operate in two segments: specialty vehicles and fleet vehicles and services. In specialty vehicles, they manufacture truck bodies and offer final assembly services. In the fleet vehicles and services, they manufacture commercial vehicles that are used in beverage and grocery delivery, mobile retail, and construction industries. SHYF announced its Q1 FY23 results, and I will analyze its results in this report. I will also look at the company's fundamentals and valuation. I think it is a great buying opportunity. Hence I assign a buy rating on SHYF.

Financial Analysis

SHYF recently posted its Q1 FY23 results . The sales for Q1 FY23 were $243.4 million, a rise of 17.6% compared to Q1 FY22. Outperformance in its fleet vehicles and services segment was the main reason behind the rise. The revenue from its fleet vehicles and services segment rose by 41.5% in Q1 FY23 compared to Q1 FY22. I believe the major reason behind the surge was favorable growth in truck bodies and improved chassis supply. However, its specialty vehicles segment struggled in Q1 FY23; the revenues from the segment were down by 7.4% in Q1 FY23 compared to Q1 FY22. I believe softness in the motorhome chassis demand impacted its specialty vehicles segment revenues. Their gross profit margin also improved to 17.6% in Q1 FY23, which was 12.5% in Q1 FY22.

Despite the decline in sales in the specialty segment, the adjusted EBITDA was $13.9 million in Q1 FY23, which was $10.1 million in Q1 FY22. I believe improved price and mix was the main reason behind the rise. The fleet vehicles and services segment adjusted EBITDA in Q1 FY23 was $12.5 million compared to a loss of $0.9 million in Q1 FY22. I think due to an increase in EBITDA, their net income rose to $1.6 million compared to a loss of $3.8 million in Q1 FY22. With improved sales, gross margin, and net income, I believe there were a lot of positives for the company, and if they can perform well in the upcoming quarters, we might see positive effects on its share price.

Technical Analysis

SHYF is trading at the $23.5 level. It is clearly in a downtrend; it has fallen more than 30% since January 2023. Despite the stock being in a downtrend, I think this can be a beautiful buying opportunity because the stock is approaching the trendline, which is at $21. This trendline is so significant that the stock has been taking support from the trendline since 2020, and not even once has the price breached the trendline. The last three times when the stock touched the trendline, it has risen more than 30%, which shows that the trendline is providing solid support to the stock. In my opinion, one can buy the stock at the $21 level with a stop loss of $17, and my target for SHYF would be around $29. This would give us a risk-to-reward ratio trade of 1:2.

Should One Invest In SHYF?

I am impressed by its increased gross profit margins and EBITDA. In Q1 FY23, they faced supply chain issues, but their higher production output offset the challenges, showing the management's efficiency. The supply chain problem is getting better with time, and by the end of Q2 FY23, I think it will have a lot lesser impact on the business than it does right now, due to which I believe its gross margins might continue to improve in the upcoming quarters.

To boost its revenue growth, it recently built a 70,000-square-foot facility in Tennessee. This location provides access to the fast-growing regions in the country. I think the company's geographical expansion into one of the fastest-growing markets might boost its revenue growth. In addition, recently, they have been awarded a contract for an 18,000 cargo van update which shows that they are on a solid growth trajectory. With improving margins, strong fundamentals, and solid growth potential, I believe it is the right time to buy the stock; the share price has corrected 30% in the last four months, which I mentioned in the technical analysis segment, so I think it is trading at a discounted price looking at its growth potential. Hence I assign a buy rating on SHYF.

Now talking about its valuation. I will use Price / Sales and PEG ratios to judge its valuation. SHYF has a Price / Sales ((FWD)) ratio of 0.74x compared to the sector ratio of 1.30x. The Price / Sales ratio is calculated by dividing a firm's market capitalization by its annual revenue. SHYF has a PEG ((FWD)) ratio of 0.72x compared to the sector ratio of 1.55x. The PEG ratio of a firm can be calculated by dividing its P/E ratio by its yearly EPS growth. After looking at both ratios, I believe SHYF is undervalued with good upside potential.

SHYF's shareholding pattern also looks positive, with institutions owning 85.4% of company shares. In my opinion, when institutions own more than 60% stake in the company for me, that company is comparatively safe to invest in.

Risk

Their quarterly operating performance is influenced by several variables, such as the timing and volume of orders, the conclusion of product inspections and customer approval, and other restructuring measures that may be occasionally implemented. For instance, due to the busy holiday delivery operations faced by some of its major customers, its Fleet Vehicles and Services segment's product shipments in the first and fourth quarters are often lower than those in other quarters. As a result, their financial results could fluctuate significantly and/or unexpectedly from quarter to quarter.

Bottom Line

SHYF is looking financially sound with improved margins and increased sales. Its valuation also indicates that they are undervalued. In addition, its stock price has corrected more than 30% in the last four months and is currently trading near a strong support zone, and I think the share might rise in the near future. Hence I assign a buy rating on SHYF.

For further details see: