2023-10-24 05:46:15 ET
Summary
- Blue Bird Corporation is a leader in the US school bus market and is poised for significant growth as an aging bus fleet is replaced.
- The company has undergone a successful turnaround, with increased margins and production efficiencies.
- Blue Bird has a sustainable competitive advantage in the alternative fuel school bus market and is well-positioned for the transition to electric buses.
In today's environment of increased geopolitical tensions, elevated inflation levels, and falling stock markets, finding an investment immune from a cyclical downturn and potentially reduced discretionary spending levels is quite Difficult.
Blue Bird Corporation ( BLBD ) is an excellent value story in these difficult times. BLBD is a leader in the US school Bus market, an industry with a CAGR forecast of 10% (ACT forecast quoted by BLBD Q3 earnings ) in the coming years as an aging bus fleet is replaced. A $5 billion US government clean bus program is driving a conversion to electric school buses where BLBD has a market-leading presence.
A two-year turnaround plan at BLBD has delivered a high-margin, highly efficient manufacturer with significant growth potential. The highest volume alternative fuel school bus manufacturer looks set for growth unparalleled in its 80-year history.
Wall Street and the SA Quant system rate Blue Bird as a strong buy. Blue Bird has a sustainable competitive advantage with a newly energized workforce, making the business an excellent countercyclical investment, a genuine value stock.
The Turnaround
From 2018 to 2021, Blue Bird seemed to spiral downward; sales revenue fell, and profits almost disappeared.
Blue Bird was hit hard by the pandemic, as school lessons moved online and school buses were put in storage. Buses were neither properly maintained nor replaced, decimating Blue Bird parts and new vehicle sales.
The pandemic reduced demand and led to supply constraints in most industries. The Backlog at BLBD crept up to 4,200 units in Oct 2021, not because of increased orders but because they could not produce vehicles being unable to source crucial components. BLBD reported minimal cancellations due to the delays and said 2,000 bus sales were deferred into 2022 ( FY 2022 ).
When the pandemic ended, supply chain issues continued, and the cost of inbound materials rose. The pre-pandemic backlog was still on the order book at fixed prices, and gross margins were wiped out, leading to the -$44 million EBIT in 2022.
Blue Bird the Turnaround
BLBD has emerged from the trauma of the pandemic as a lean and efficient producer with market-leading, high-margin products in an industry primed for significant growth. Management has transformed the business by concentrating on margins, production efficiencies, and staff.
Margins
Increasing margins is not simple; by 2022, gross margins had dropped to 4.6%, turning cash flow to the company negative and unsustainable. 2023 margins are coming in around 16% (Q3 earnings call), an astonishing turnaround. BLBD has achieved this by implementing several key strategies.
The first and most obvious was to increase prices. It is easy to say but not always easy to do. From 2021 to 2023, sale prices increased by 25%, and 2024 models have a further $2,500 per bus increase. New contracts have price escalation clauses to cover changes to raw materials. Despite the price increases, sales volume is up over the period, and BLBD now has a backlog of 5,000 units, almost all of which are at the new higher price points (slide 17 of the Q3 earnings presentation) . This backlog is due to increased orders, not a lack of production.
Workforce changes to drive efficiency
An almost complete change in senior management was enacted in 2021 (FY 2022); the new administration has worked to improve employee relations and redesign operating practices and factory layout. Total headcount has been reduced from 2,300 in 2020 to 1,600 today, a drop of 30% while at the same time increasing production.
BLBD managed this change in workforce carefully, and employees have received significant improvements in terms and conditions, including additional paid holidays, pay raises, and improved benefits. The workforce voted to unionize last year, increasing their sense of job security. BLBD now works closely and transparently with the United Steel Union. (Q3 2023)
The changes have had a dramatic effect; it now takes 20 days from starting a build to booking; it used to take 40 days. (Q3 2023)
Market Changes driving the product mix.
After the pandemic, most schools have returned to face-to-face learning. BLBD has seen a boost to its spare parts business as buses go back into operation, and with an aging fleet, new orders are arriving with some urgency. This spending is not discretionary; the buses must be replaced, and the market will be far more robust and predictable than many others.
The market for School Buses is Transitioning to cleaner fuels
Diesel is being replaced as the dominant fuel by CNG and electricity. BLBD gave the following guidance ( P23 slide show )
EVs are the highest margin and highest priced of the three options, with diesel being the lowest priced lowest margin product. Alternative fuels are an area in which BLBD has had particular success. They claim a 60% market share of the alternative fuels market, and only they and Thomas Built Buses currently offer a CNG version. Blue Bird has produced 20,000 CNG buses using a Ford engine and ROUSH CleanTech low-pressure system. In the Q3 earnings call 2023, the relationship with Ford and Rousch was described as exclusive. CNG lowers fuel prices by around 50% compared to diesel and has fewer emissions.
Cummins provides the electrical drive train through its Accelera brand name. The deal with Accelera appears to be exclusive, although I could find no evidence of this. Blue Bird is featured on the Accelera website , and none of the BLBD competitors use the Accelera products. Cummins is an excellent partner in this field, having extensive electrical engine experience and a Hydrogen Fuel cell division for the future. The Cummins deal may be a source of a sustainable competitive advantage, Blue Bird's biggest competitor may have a problem in this area. (discussion below of Thomas Built Buses)
BLBD has produced more alternative fuel buses than the rest of the industry combined. (FY 2022 CEO)
EV Production
Fuel represents the most significant cost for School bus operators, and that price looks to be increasing. A general awareness about air pollution and the effects of car emissions on climate change are all driving a move towards the electrification of the school bus fleet. Electric buses reduce maintenance costs by as much as 80% and reduce the total cost of ownership. The range anxiety that appears to have halted the adoption of battery-electric heavy-duty trucks is not as crucial in school buses as they tend not to cover significant distances daily.
The US government has launched several plans that give incentives to help states and schools move to electric vehicles. In 2022, a bi-partisan $5 billion dollar scheme was launched to replace existing diesel buses with zero-emission ones.
The scheme will award $1 billion in grants annually from 2022-2026. The 2022 awards have been announced, and BLBD did exceptionally well. Using the published data, I forecast the following sales for the 2022 round. (I could identify the supplier of 790 of the awarded buses from the published list and then assumed the % would be valid for the other awards where I could not find the manufacturer.)
Blue Bird has the largest market share, followed closely by Thomas Built Buses wholly owned subsidiary of Daimler Truck ( DTRUY ), Lion Electric (LEV:CA), and Navistar (known as IC Bus).
Competitive analysis of the different buses
The buses are all quite similar; Thomas Built uses the Proterra Inc. ( PTRAQ ) power train. Proterra stunned the industry in August when it filed for Bankruptcy, covered in this article by the excellent analyst Henrik Alex. We will have to wait to see how Thomas Built is affected. The parent company of Thomas Built Daimler Trucks North America may get involved by buying some of Proterra or supplying a new power train.
I looked at Lion Electric in this article and considered them a buy.
Likely, the quality of the dealer channel, established service centers, and earned trust levels allowed BLBD and Thomas Built to acquire the largest market share. The problems with Proterra may push more orders towards BLBD in the future; however, in the Q3 2023 earnings, the CEO said he hoped to gain a little more than 25% of future awards, which would agree with my earlier analysis.
This government initiative should deliver more than 700 EV school Bus orders to BLBD annually for the next five years, a transformative repeat order.
In the Q3 2023 earnings call, the CEO said that BLBD now had 550 EVs in the backlog, and deliveries were up 50% year on year. BLBD continues to invest in its EV production upgrading facilities at its new EV production center. Alternative fuel buses were 63% of unit sales in the quarter. "We continue to be the clear leader in this space. No other manufacturer comes close to these numbers." said the CEO.
To further emphasize the transition, Britton Smith was appointed company president; Britton led the EV side for the previous 18 months.
A 40,000 sqft building has been converted for EV chassis assembly, and capacity has increased from 2 units per shift to 4 with the expectation that they will move to 6 buses per shift later in the year. A double shift would give a capacity in excess of 5,000 units per year. A potential second market for these vehicles has been identified, selling commercial strip chassis for last-mile delivery; they should be with customers sometime in the next six months.(Q3 2023 transcript)
The new efficiencies and changing product mix make a material difference to BLBD operating figures. In the q3 earnings, the following statistics were released.
Unit sales up 24% year on year
Net revenue of $88 million, 43% higher than last year
Free cash flow of $43 million was $83 million higher than the previous year's outflow
Average revenue per bus increased 17% to $126,000
The gross margin across the business was 15%
EPS was $0.44, up from -$0.09 last year.
Valuation
The SA Quant system has rated BLBD a strong buy since April 2023, placing it 3rd out of 42 in its industry. Most SA readers will be aware of the Quant system's predictive ability. In BLBD, we have a mix of the Quant system using historical data to make a positive prediction combined with a clear business case for increasing profits and returns.
Wall street also gives it a strong buy with six analysts covering the stock.
The six analysts give an average one-year price target of $27.58, an increase of almost 50% from today's price, and they are highly correlated with only a 15% difference between targets.
The same analysts give an annual forecast earnings growth of 92%, giving an EPS target of $2 in 2025 from its negative $1.66 at the end of 2022.
Using management guidance, I have constructed a 3-statement. The medium-term forecast for revenue is less than that provided by the management guidance, and margins are slightly tighter than the guidance. I am unsure if it will be possible to maintain their 28% EV market share and keep the same high margins. There will be other entrants to this space, which will inevitably have some impact.
The model leads to a fair value of $31.50, almost 70% higher than its current valuation.
BLBD is 14% owned by the general public and 84% owned by institutions/investment companies, and the share price is up 150% in the last year; however, it has fallen from its June high of $28.
There has not been meaningful dilution in the last year. However, some of the most significant shareholders have taken advantage of the 100% share price increase to book some profits on their investment.
American Securities remains the largest single shareholder with 20% of the stock.
Finances and Risks
As discussed, BLBD has had several difficult years, and the balance sheet still reflects this.
Short-term assets do not cover short-term liabilities; shareholder equity (Total assets – Total Liabilities) is only $10 million. Debt is $135 million, giving a debt-to-equity ratio of 1,292%. EBIT does not cover interest payments, but this is better than the negative equity situation of 2021.
Blue Bird will need the EPA school bus program to run its full five years and to maintain its high-margin product mix, enabling it to continue generating positive cash flow as it improves its financial position. With only $136 million of available liquidity, interest payments of $15 million per annum, and operating costs in the region of $100 million, the company has little room for error. The business is on an excellent path but does not have the luxury of being able to afford many setbacks.
Conclusion
BLBD is a market leader in an established industry entering a growth stage. The growth is due to pent-up demand caused by delayed decisions during the pandemic, a significant government incentive scheme to transition to zero-emission buses, and an ongoing need to update the country's aging fleet of school buses.
The alternative fuel School Bus market is a high-margin sector where BLBD has a significant and sustainable advantage with excellent products and the support of leading power train suppliers Cummins and Ford. The competition uses less well-known drive-train suppliers, and Blue Bird's largest competitor uses a power train from a bankrupt supplier.
BLBD has a large backlog of orders at newer, higher price points and is in the process of increasing manufacturing capacity.
The industry for school buses is unlikely to be affected by any slowdown in consumer spending or any fallout from the current geopolitical events unfolding.
BLBD represents an excellent countercyclical investment and seems to be excellent value.
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Blue Bird: A Countercyclical Value Buy