2023-03-23 13:01:42 ET
Summary
- Revenue should benefit from elevated backlog levels, higher replacement demand for the aging national school bus fleet, and Federal funding for the electrification of school buses.
- Margins should benefit from a declining input cost, the execution of a higher priced backlog, and a mix shift to higher margin EV and alternative fuel school buses.
- Valuation is reasonable.
Investment Thesis
Blue Bird Corporation's ( BLBD ) revenue is poised to benefit from elevated backlog levels and higher pricing on that backlog in the coming quarters. Additionally, the company should see gains from the Environmental Protection Agency (EPA) clean school buses rebate program and increased replacement demand for the aging national school bus fleet in the near and long term. In terms of margins, lower input costs and the execution of a higher-priced backlog should be a near-term tailwind. In the medium to long run, an increased mix of higher-margin EV and alternative fuel school buses due to the EPA rebate program should improve margins. The company's valuation is also reasonable. So, I have a buy rating on the stock.
Revenue Analysis & Outlook
Following the pandemic, BLBD experienced a decline in demand, which was subsequently compounded by supply chain issues and component unavailability. However, as the supply chain has begun to ease, the company has started to see benefits.
In 1Q23, the company reported an impressive 82.4% year-over-year increase in revenue, which reached $236 million. Bus sales revenue grew 89.4% year-over-year, while parts sales revenue increased by 33.9% year-over-year. The strong growth in revenue was primarily driven by improvements in the supply chain, resulting in better execution of elevated backlog levels. During this quarter, the company delivered 1,957 buses, representing a 70.4% year-over-year increase. Pricing also contributed 11.4% year-over-year to the company's revenue growth.
BLBD Historical revenue growth (Company Data, GS Analytics Research)
Looking ahead, I expect the robust revenue growth momentum to continue in the coming quarter, with benefits from better backlog conversion into revenue, higher pricing on backlog orders, and Federal funding for the electrification of school buses.
After experiencing a decline in demand during the lockdown, the company saw some demand recovery when schools reopened. However, it faced supply chain issues starting in the second half of FY21. These supply chain issues impacted the company's ability to source key components and resulted in a lower conversion of the backlog. As a result, the company's backlog increased from 1,344 units in FY19 (pre-pandemic level) to over 5,300 units in 1Q23. The good thing is these supply chain issues are now easing, which should increase the backlog conversion rate and help revenue growth.
Further, over the last 18 months, the company has implemented various price increases to offset higher input costs. These higher-priced orders are now in backlog and are yet to be delivered. On a year-over-year basis, the company's backlog ASP is up 22%. So, in addition to unit growth, the company should also benefit meaningfully from pricing growth.
In addition to elevated backlog levels, the company should also benefit from the Infrastructure Investment and Jobs Act (IIJA) funding. The recently enacted IIJA allocates $5 billion to help local school jurisdictions purchase zero and low-emission buses from 2022 to 2026. In October 2022, the Environmental Protection Agency (EPA) announced awarding of approximately $913 million from IIJA as part of the 2022 Clean School Bus Rebate Program , with 95% of the awarding going towards EV school buses. The company started to see orders from the EPA's clean school bus rebate program in 1Q23, with the largest volume of EV orders coming from customers in the states of Nevada, Kentucky, Tennessee, and Utah. Management expects a total of 500-700 new EV buses or $200 million worth of incremental orders in the coming few quarters from the funding already distributed to schools. Overall, management expects a total of $1 billion of incremental revenue for the company from this rebate program in the coming years.
Furthermore, in the long run, the company's revenue should benefit from the aging national school bus fleet. As schools began to reopen in FY22, the industry witnessed strong demand for school buses. Currently, approximately 43% of the existing national school bus fleet is 10 years or older and is expected to be replaced in the coming years. I believe that the replacement demand for these school buses should continue to benefit the company.
School Bus Fleet Age (Company's Investor Presentation)
In addition to near and long-term revenue drivers, I like the company's presence in the school bus industry, which tends to be resilient during a recession.
Margin Analysis & Outlook
Following the pandemic, BLBD's margins were impacted by volume deleveraging and subsequent increases in input costs. The company usually takes orders at fixed prices and realizes these orders at a later date in revenues upon delivery. Any increase in input costs between the date of order booking and delivery is usually borne by the company. Hence, due to the rise in steel prices and other input costs in 2021 and early 2022, the company experienced significant margin pressure for the last two years. Although input costs were stabilizing in early 2022, the Russia-Ukraine war reignited input cost inflation, resulting in a delayed impact on the company's margins in 4Q22 and 1Q23.
Historical EBITDA margin performance (Company Data, GS Analytics)
Looking ahead, I believe the company's margins should recover sequentially throughout the year with the benefits of lower input costs and conversion of the higher-priced backlog. Moreover, the mix shift toward higher-margin EV buses due to the EPA rebate program should also benefit margins in the long run.
After a brief uptick when the Russia-Ukraine war started, steel prices stabilized again in the latter half of 2022. The delayed effect of the price decline should flow through the P&L in the next few quarters when lower COGS related to these orders are recognized. Moreover, during the last 18 months, the company has been increasing prices to offset input cost inflation. These higher-priced orders are now in the backlog. As these higher-priced backlogs are converted into revenue with lower realized input costs, the company should witness margin expansion in the coming few quarters.
Furthermore, orders from the recent EPA clean school bus rebate program should shift the company's revenue mix toward higher-margin EV and alternative fuel school buses. The company delivered 123 and 269 EV school buses in 2021 and 2022, respectively. In 1Q23 alone, the company delivered 92 EV school buses, which was up 130% versus the previous year. The momentum should continue, and the company should witness a substantial increase in demand for EV and alternative fuel school bus sales in the near and long run, resulting in a mix shift toward higher-margin buses.
Valuation & Conclusion
A lot of things have gone wrong for the company over the last couple of years, which have impacted the company's revenues and depressed its margins. As a result, the company is expected to post just $0.28 in EPS for FY23 (ending September) and its P/E on these earnings is 68.61x. However, as the company's business recovers over the next couple of years, it is expected to post a sharp recovery in its earnings and its P/E on FY24 and FY25 EPS is 13.92x and 8.64x, respectively.
I find the company's forward P/E on FY24 and FY25 earnings reasonable. This coupled with its attractive near and long-term prospects makes BLBD stock a good buy.
For further details see:
Blue Bird: Good Near Term And Long Term Prospects