2023-09-22 03:13:58 ET
Summary
- Despite poor performance in recent years, Blue Bird Corporation has implemented successful turnaround strategies and has seen improvements in its financial performance and stock prices.
- The secondary public offering of 2.5 million shares by major shareholders reduced their ownership stakes but increased market liquidity and attracted more investors.
- The buy rating from Bank of America reflects analysts' confidence in Blue Bird's future growth and performance, particularly in the expanding market for school bus electrification.
- Based on the effective turnaround strategies and the growing market, I am bullish on BLBD stock and recommend it to growth-oriented investors.
Investment Thesis
Despite a poor performance over the last five years, I am bullish on Blue Bird Corporation ( BLBD ) based on my assessment of its turnaround strategies and other recent events, such as the secondary public offering . Since 2018, BLBD's financial performance has been on a consistent downward trajectory, which has also been matched by a 22.94% share price slump over the same time frame.
Following the poor performance, whose magnitude grew from 2022 due to the COVID-19 pandemic, the company embarked on a turnaround strategy, which, based on my evaluation, has borne fruit thus far and will also propel future growth; for instance, its financial situation has improved in 2022 FY, and the current FY and its share prices have grown by about 110% over the last year. Further, on evaluating recent news, such as the secondary public offering and the buy rating recommendation from Bank of America , I find more reasons to be optimistic about the company's long-term trajectory. For these reasons, I am upbeat on this stock and rate it a buy.
Secondary Public Offering: Short And Long-Term Implications
A secondary public offering is the sale of new or existing shares of a company to the public by one or more of its existing shareholders. Depending on the objective, size, and timing of the offering, a secondary public offering can have an array of implications on the company's future performance and stockholders. With this context in mind, I will present my full assessment of BLBD's secondary public offering in this section.
BLBD's secondary public offering , which was announced on September 11, 2023, was the sale of 2.5 million shares of common stock by Coliseum Capital Management LLC and American Securities LLC, two of its biggest shareholders. The offering was solely comprised of secondary shares, implying that the corporation did not issue any new shares and received no revenues from the sale. It was priced at $20 per share, a 9.6% cut to the September 10, 2023 closing price of $22.12.
Based on this information, here are my thoughts on the potential long- and short-term implications of this secondary public offering:
The deal reduced the selling stockholders' ownership position and voting power in the company. According to the company's proxy statement, as of June 30, 2023, Coliseum Capital Management LLC and American Securities LLC owned 24.3% and 14.6% of the company's common stock, respectively. Following the offering, their ownership stakes fell to 18.9% and 11.2%, respectively. This will impact the shareholders' influence and control over the company's strategic decisions and board makeup.
The offering raised the market liquidity and float of the company's common stock. The float is the quantity of shares that are available for public trade. As of September 15, 2023, BLBD had a float of 23.5 million shares, according to Yahoo Finance . Following the offering, the float expanded to 26 million shares, representing a 10.6% rise. In my opinion, this increased the stock's trading volume and price discovery while also attracting extra investors and analysts to the company, putting downward pressure on the company's stock price in the short run.
Furthermore, it was priced below the market price, implying that the selling shareholders were willing to accept a reduced valuation for their shares. This could indicate to other investors that the company's prospects are not as promising as projected or that the market is oversaturated with shares. The offering also increased the supply of shares relative to demand, thereby lowering the stock's equilibrium price. According to Yahoo Finance, on September 13, 2023, the first trading day following the news of the offering, the company's stock price fell by 8.4%; this lends credence to my assertions. Based on this information, the short-term consequences of this offering aren't promising, and it, in my opinion, explains the stock's short-term price fluctuations following the news.
While the short-term implications have been somewhat negative, which, in my experience, is primarily driven by emotions and immediate sentiments that are mostly pessimistic, my long-term view of this offer is very positive. I believe it speaks volumes about the company's confidence in its long-term performance. The following are my arguments in favor of my position:
No dilution: In my perspective, the secondary offering indicates that the company is confident in its future prospects and performance because it does not require additional financing through a dilutive issuance. This position can be supported by the company's improving financial performance since 2022 FY and the promising financial projections up to 2025.
Improved Liquidity: With the shares valued at $20, the company was to generate $50 million in liquidity, which is 3.52x its MRQ total operating expenses. In my opinion, this explains the company's capacity to finance its operations easily and execute its plans seamlessly, resulting in improved performance in the future.
Improved governance: The reduced concentration and control of the major two shareholders, in my opinion, will result in improved corporate governance and transparency because their control has been minimized, and new shareholders who will come on board, I believe, will push for the best practices to realize the fruits of the investment.
Based on this information, I am optimistic that this offering will translate to improved long-term performance. From my experience, the negative shorter-term implications are normal, and I disregard them and credit the bigger picture of the transaction.
Bank Of America Rating: Why I Think It Matters
BLBD landed a buy rating from the Bank of America. I believe this is a good sign for investors and the company's future growth and performance. Here are my thoughts on why it matters:
- The buy recommendation implies that analysts are bullish on BLBD's stock price and value based on their research and analysis of the company's business fundamentals, competitive advantages, and growth potential. Analysts set a target price of $26.50 for BLBD, implying a 38.7% upside potential from the current market price of $19.10 as of September 21, 2023.
- It reflects analysts' acknowledgment of BLBD's turnaround efforts, which have increased profitability, cash flow, and contracts. According to the analysts, BLBD has redesigned its internal policies to increase operational efficiency and customer satisfaction, which, in my opinion, should result in greater cycle-to-cycle performance improvement while school bus demand recovers from the pandemic.
- The ranking also emphasizes BLBD's market leadership in the expanding and lucrative sector for school bus electrification. According to industry experts, BLBD's electric and low-emission bus offerings are diverse enough to meet the preferences of a wide range of customers. They also mentioned that the federal government's $5 billion investment in the electrification of school buses might help BLBD by increasing the company's sales and market dominance. Based on this information, I concur with the rating because government support in a lucrative market should be a solid growth lever.
In conclusion, based on these three primary viewpoints, I believe the company is on a solid growth trajectory. This is because it can entice more investors and analysts to follow the company, raise stock liquidity and visibility, and improve its market reputation and credibility. The rating may also encourage BLBD to continue its efforts in innovation and expansion, such as developing new electric bus models, entering new markets, and attracting new customers. These factors may boost BLBD's financial results and shareholder value in the long run.
Turnaround Strategies: Milestones, And Potential Implications On Future Performance
Since 2018, BLBD's financial performance assumed a downward trajectory. In 2022, its problems escalated due to COVID-19 challenges impacting its sales, production, supply chain, and profitability. As a result, the company devised a rigorous 18-month strategy to enhance its operations, lower its fixed costs, and recover its economics through pricing.
Some of the key initiatives employed include, but not limited to, optimizing its manufacturing footprint by consolidating its chassis assembly operations into one facility and enhancing its product portfolio by introducing new models and features, such as the Vision Gen 5 bus, among others. Following these turnaround strategies, the company produced considerable success in the third quarter of fiscal 2023, completing its turnaround. Among the highlights were:
- Net sales of $294.3 million, up 43% year-over-year
- Net income of $9.4 million, up $15.8 million year-over-year
- Adjusted EBITDA of $28 million, up $19.2 million year-over-year
- Unit sales of 2,137 buses, up 24% year-over-year
- Order backlog of nearly 5,200 units, up 29% year-over-year
I believe these highlights were watershed moments in the company's recovery efforts. Based on the current financial performance and the optimistic forecasts through 2025, I believe it is reasonable to say that the turnaround measures have started paying off.
Interestingly, after analyzing the initiatives, I found that some of them will affect the business's performance over the long run, which gives me confidence that the company can maintain the positive financial performance it is currently achieving, as mentioned above. The following are a few variables that could affect how well it performs in the future:
The differentiation strategy focuses on establishing brand loyalty by providing premium items of high quality, dependability, and safety. I believe this will help the company grow its customer base, translating to increased revenues and market share.
The second strategy is innovation, which seeks to maintain its technological leadership by producing new products and features that satisfy customers' changing demands and preferences. This will help them remain relevant in a dynamic market and maintain a higher degree of customer satisfaction by offering them what they need.
The robust estimated market growth will supplement these long-term growth levers. The global Electric School Bus market was valued at $14250.76 Million in 2022 and is expected to reach $39629.24 Million in 2028, at a CAGR of 18.58% between 2022 and 2028. The interplay of these long-term-oriented strategies and the growing market bodes well for the company's future growth, laying a strong basis for my bullish stance.
My Investment Take
Based on this analysis, BLBD has executed very strong turnaround strategies, which have started paying off already. The long-term nature of some of the turnaround strategies supported by the strong projected market growth gives me confidence in the company's future growth, which is further affirmed by strong future financial projections.
As a result, I am bullish on this stock and recommend it to growth-oriented investors. My bullish stance is further backed by the Bank of America rating, which I agree with based on my three viewpoints in this analysis. The secondary offering also offers me a reason to be optimistic in the long-term perspective.
Nonetheless, despite my upbeat outlook, investors should proceed cautiously because investing here comes with its own risks. One major risk of investing in BLBD is that it can lose its technological leadership and competitive advantage in the electric and low-emission school bus industry. The electric and low-emission school bus market is very competitive and dynamic, with new entrants and incumbent rivals challenging its position. For example, Lion Electric, a Canadian firm specializing in electric vehicles, announced a deal with Amazon to supply up to 2,500 electric delivery trucks by 2025.
For further details see:
Blue Bird: A Bright Future Anchored On Effective Strategies