Summary
- I think management is overly optimistic in the short term based on economic conditions that aren't as clear as they may think.
- Its heavy exposure to government funding could result in delays in deploying funding, which could result in uneven reporting periods in 2023.
- Assuming steel prices remain modest, it's going to be a strong tailwind in 2023, especially much of its backlog commanding higher prices.
Blue Bird Corporation ( BLBD ), as company designs, engineers, manufactures, and sells school buses, appears to be in the early stages of sustainably turning its performance around, with tailwinds like improved prices, lower input costs from steel, and the increasing number of government programs that are targeting replacing the aging school bus fleet, including with EV buses.
Management is very positive on the short and long-term growth potential of the company, but in regard to its near-term performance, I don't believe there is enough economic clarity to provide the type of guidance they gave for 2023.
My belief is the first half of 2023 will remain very challenging economically, and that could easily result in delays in the release of funds, resulting in very uneven quarterly results.
Further out things are finally looking better for BLBD, but I see it having a lot of work to do before it can be considered a sustainable, long-term growth story.
In this article we'll look at its recent numbers, the potential tailwinds at its back, and a closer look at headwinds that are likely to frustrate short term optimism.
Some of the numbers
Revenue in the fourth fiscal quarter of 2022 was $258 million, up $66 million or 34 percent from the fourth fiscal quarter of 2021. Full-year 2022 revenue was $800.6 million, up $116.6 million over full-year revenue for 2021.
Breaking it down by segment for full-year fiscal 2022, bus revenue was $724 million, and parts revenue was $77 million, up 30 percent or $18 million over full-year fiscal 2021.
Adjusted EBITDA in the reporting period was negative $(16) million, which included an inventory charge of approximately $9 million in the quarter. At the same time, the company was able to bring its inventory level down to normal levels in the reporting period, resulting in adjusted free cash flow was $30 million, an improvement of $70 million year-over-year. Full-year adjusted free cash flow was negative $(22.8) million, up $39.2 million from the negative adjusted free cash flow of $(62) million for full-year 2021.
Adjusted EBITDA for full-year 2022 was $(14.7) million, down $(48.8) million from adjusted EBITDA of $34.1 million in full-year 2021. Full-year adjusted EBITDA margin was (1.8) percent, down (680) basis points from 5.0 percent in full-year 2021.
Adjusted net income for full-year fiscal 2022 was negative $(36) million, down $(44.7) million from full-year fiscal 2021 adjusted net income of $8.7 million.
SG&A expenses were $77 million in the reporting period, up approximately $12 million year-over-year. Net loss was $(1.48) per diluted share for the fourth fiscal quarter of 2022.
At the end of the fourth fiscal quarter of 2022 the company held cash of $10.5 million with debt of $170.2 million.
As we can see from some of these numbers, the company appears to be moving in the right direction. Some of the headwinds are slowly dissipating, but it will take time for the company to sustainably maintain growth momentum.
Strong tailwinds
Backlog and pricing
The first tailwind at its back heading into calendar 2023 is the backlog of 5,000 plus units valued at about $600 million, with most of them selling at a higher price than fiscal 2022 units.
The average revenue per bus increased from $94,000 per unit to $106,000 per units. That came from increasing prices as well as the higher mix of electric buses which climbed from 2.2 percent the year before to 3.9 percent.
There will continue to be more EV sales going forward, because of demand and an improving supply chain, but at this time it's hard to know if the percentages will increase because of the added sales of its normal buses to the mix as well.
EPA's Clean School Bus Rebate program
Another positive catalyst that should have a significant impact on the performance of BLBD is the EPA's Clean School Bus Rebate program, which will allocate $5 billion over a period of five years for the purpose of providing school buses with cleaner emissions.
In the first round of funding there will be approximately 2,500 buses funded with an average rebate of $375,000 per bus. The company secured about 300 buses under the program while its customers secured at least another 200 buses. Based upon its estimates of securing from 500 to 700 more EV orders, BLBD projects it'll add another $200 million in revenue to its performance in the near term, and over the long-term over $1 billion is expected to be added to the top line.
Management let it be known that there are other funding programs in major markets like California, New York, New Jersey and Colorado that together have billions in funding "allocated to this purpose."
This could be a huge tailwind for the company if it manages to secure a significant amount of that funding, in addition to the funding from the EPA program.
Steel pricing
Steel prices in the recent past have been a major headwind for BLBD, with prices rising to over $2,000 per ton (depending on which steel category being priced) in July 2021 and staying at that level or above until about the start 0f 2022.
Since then, HDG and CR prices have pulled back to the $800 to $880 per ton mark, and with the World Steel Association seeing steel demand rising by a modest 1 percent in 2023, the impact upon margins and earnings aren't likely to be meaningful.
That suggest 2023, as far as material costs are concerned, is going to be vastly improved from the costs for full-year fiscal 2022.
Conclusion
There is a major concern I have with the outlook for Blue Bird Corp., and that is it's almost too clear in its 2023 estimates. I've been reading hundreds of earnings reports and commentary from management across a number of industries over the last several months, and BLBD is by far the most clear and optimistic in regard to its performance in 2023.
Let's take a look at its backlog as an example. It's one thing to have a solid backlog, it's quite another to have that translate into actual payment. That's especially true from the heavy exposure the company has to public funding, which is historically fickle and uneven.
Under the current economic environment which I believe over the next year is simply impossible to operate with this type of clarity, there is a strong possibility of delays in orders and fundings that are directly connected to the backlog of BLBD. I'm so convinced of this based upon the experience of many other companies, that I would include it in my short-term model concerning the company's performance.
While I think the EPA's Clean School Bus Rebate program will be a win for the company, in the near term it may not deliver what management, or the market expects of it. The point is it could go either way in regard to delays, so should be considered of more value to the long-term performance of the company.
These things are important because of the entry point investors may get in at, which I lean toward being more favorable in the first half of calendar 2023.
I do believe things are starting to improve and look more favorable for BLBD, but it appears to be the company will continue to struggle until confirmation of funding being delivered in an economy that can be very disruptive, to say the least.
Longer term I think Blue Bird has a lot of potential because of the need for school districts to upgrade their bus fleet, but I've seen that several years ago in the shipping industry when the same circumstances applied. While there are upgrades in shipping fleets going on, it took longer than expected for it to play out. I think the same is true with school buses.
I think the public and private sector are going to continue to be cautious until the type of economic visibility they need to make spending decisions is clearly in place. For that reason, I'm not too optimistic in the short term for BLBD, but further out I think it's going to do very well.
The best play in my opinion will be to wait for confirmation on confirmed spend, and if the share price gets a nice correction, look to take or add to a position at that time.
For further details see:
Blue Bird: Not Optimistic Short Term, But Further Out Looks Promising