2023-03-21 09:33:47 ET
Summary
- Growth is really picking up for Blue Bird with fiscal 2024 expected to be a blowout year.
- Sales volumes (Which came in 70% higher over Q1 of last year) came in at record levels in the fiscal first quarter of 2023.
- The technical chart is aligned with the significant electric school bus demand Blue Bird is experiencing.
- I believe share price gains will continue if growth keeps accelerating. Downside risk however is where investors need to remain watchful.
Intro
If we pull up an intermediate chart of Blue Bird Corporation ( BLBD ) (EV School Bus Manufacturer), we see that shares have been on a rampage since October last year. Shares have returned over 160% over this timeframe as buyers have come in here in a big way. The most near-term catalyst for the spike in the share price was the company's most recent first-quarter earnings numbers. Although profitability once more came in negative, sales volume almost hit 2,000 units for the quarter. Management now believes that the company's much improved operational performance (Which continues to drive costs out of the system) coupled with strong demand, especially in the EV segment, will drive profitability forward (And consequently shares of Blue Bird). Q1 trends definitely point to this taking place (If trends persist) as adjusted free cash flow ($20 million) rose an impressive $54 million compared to the same period of 12 months prior.
BLBD Technical Chart (Stockcharts.com)
Q1 Momentum
Management also gave out detailed forward-looking guidance as we see below which forecasts strong growth, to say the least. There is a number of tailwinds that play into these numbers. First is the US EPA Clean School Bus Rebate Program which incentivizes customers to avail of the program due to the sizable rebate involved. Then you have the cyclical reason which demonstrates that school buses (In terms of purchased units in recent years) remain well below historic averages. Thirdly, you have the legacy price buses (Which are lower-margin units already ordered by customers in past times that need to be fulfilled) that slowly but surely are disappearing from Blue Bird's backlog. Suffice it to say, it is not solely the EV space that is driving Blue Bird's fundamentals forward but also much-improved forward-looking pricing, as well as operational performance, is expected to drive sales higher.
Blue Bird FY23 Guidance Raise (Seeking Alpha)
Suffice it to say, as long as trading conditions (concerning reducing inflation, supply chain, government funding programs, etc) remain intact, Blue Bird's volumes should continue to grow. However, after perusing Blue Bird's financials, it would be wise for the long-term investor to monitor the trends discussed below as some active management may be needed for long exposure here. What we mean by this is Blue Bird's future success (Regarding share-price appreciation) looks to be largely predicated on what types of forward-looking growth rates it can report. This brings an element of downside risk (If growth projections were to disappoint) to the table for the long-term investor for the following reasons.
Shareholder Equity
At the end of the company's most recent quarter, Blue Bird reported negative shareholder equity of $9.2 million and long-term debt of $129.3 million. Cash at the end of Q1 came in at $5.7 million. Now, negative book value or net worth is not a big issue when sales and earnings are rising aggressively. The question however is how the market would view negative book value in a negative growth environment.
For example, $4.3 million went towards servicing this debt in Q1 off a gross profit of $7.5 million. This means that Blue Bird's margins are so thin, it needs to be able to turn over its inventory as quickly as possible (As it did in Q1) in order to keep on improving its returns. If trading conditions for whatever reason going forward do not facilitate this strong turning over of capital, the company's equity and specifically its debt payments would come in for far more scrutiny.
Put another way, if Blue Bird's business was liquidated today, it does not have a positive net worth as its liabilities fractionally surpass its amount of assets. However, the market cap of the company at $613+ million (its value) is due in large part to the earnings growth which is expected to come over the next few years.
Blue Bird: Expected Forward-Looking Earnings (Seeking Alpha)
Inflation
As mentioned above, Blue Bird reported $7.5 million in gross profit off total sales of $235.7 million in the first quarter. This equates to a gross margin of 3.2% for the quarter which means Blue Bird's "cost of goods sold" amounted to almost 97% of the company's Q1 turnover. Now although Blue Bird has been making solid strides with respect to the efficiency of its operations, more of this will be needed to protect the income statement for the following reason. Having a low gross margin gives the company a low margin of safety in the event inflation remains buoyant. Suffice it to say, if the cost of revenues were to continue to increase through inflation, bus sale prices would correspondingly have to be increased to compensate. Higher prices could obviously affect demand so it would be interesting to see how Blue Bird would cope with this issue if indeed inflation were to remain elevated.
Conclusion
To sum up, Blue Bird at present is riding the electric vehicle tailwind as demand has returned to the school bus space with a vengeance. Furthermore, with the legacy-priced units almost entirely out of the way, Blue Bird's financials are set to improve if demand can be fulfilled promptly. If this happens, shares can continue rallying here. Nevertheless, high debt, as well as low margins, bring some risk to this play if trading conditions were to change for the worse. Let's see what Q2 numbers bring. We look forward to continued coverage.
For further details see:
Blue Bird: Continues To Ride The EV Tailwind