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Investment thesis
Our current investment thesis is:
- BLBD is currently primed to begin a multi-year expansion period, underpinned by multiple growth levers including an aging vehicle fleet in the US, investment in the electrification of said fleet, as well as greater pricing power, and a market-leading competitive position.
- We have seen sufficient visibility of its improvement to imply execution risk is low enough to suggest the company is undervalued at its current share price.
Company description
Blue Bird Corporation (NASDAQ:BLBD) is a leading American manufacturer of school buses. Blue Bird designs, engineers, manufactures, and sells school buses and aftermarket parts in the United States, Canada, and internationally.
Share price
BLBD’s share price performance has been respectable, returning over 90% to shareholders during the last decade. This said, its performance has been volatile, reflecting in consistent financial development.
Financial analysis
Presented above are BLBD’s financial results.
Revenue & Commercial Factors
BLBD’s revenue has grown respectably, with a CAGR of 4% into the LTM period. In conjunction with this, the company’s margins have declined, as EBITDA has declined at a (10)% rate.
Business Model
BLBD is primarily engaged in the design, engineering, manufacture, and sales of school buses. The company has a significant presence in the North American market, alongside Thomas and IC.
BLBD also provides aftermarket parts and services to support the maintenance and repair needs of its buses. The company has sought to develop alternative revenue streams alongside its primary manufacturing service, as it allows BLBD to develop long-term customer relationships and contributes to more sustainable revenue generation.
BLBD often participates in government contracts to supply school buses to various school districts. These contracts provide a steady source of revenue and contribute to the stability of the company’s operations.
The company has had a difficult few years, owing to the impact of Covid-19, as well as a broader trend of tightening financial spending in the US. As the following illustrates, demand declined post-GFC, only rising for a few years before the impact of the pandemic. This has contributed to a difficult period for the company, although inherently positions it well for greater success in the coming years.
The reason for this is that the US School Bus fleet has materially aged during this period, with ~43% of the fleet now aged beyond 10 years. This means replacement capex will begin to accelerate alongside inherent demand with population growth, positioning BLBD well for an uptick in demand.
The Industry
The following are material factors impacting the business going forward:
- Transition to Electric Vehicles: BLBD has embraced electric propulsion systems, positioning it well to transition to electric school buses. Factors such as high upfront costs, limited charging infrastructure, and the need for convincing financial incentives are key factors that potentially will slow adoption, and so we consider this a several-decade trend. BLBD is expecting lifetime benefits in excess of $1b and is seeking to develop a range of revenue streams from this.
- Transition to Alternative Fuels Challenges: While the focus on alternative fuel solutions aligns with sustainability trends, the transition to these technologies may pose challenges to ensuring it is economically viable and compatible with infrastructure.
- Dependency on Government Funding: BLBD is significantly dependent on government contracts and funding for school transportation. Changes in government policies, budget cuts, or delays in funding allocation can materially affect the company’s revenue and growth prospects.
- Long Replacement Cycles: School buses typically have long replacement cycles, and districts may delay purchasing new buses if existing ones are still functional. This can result in periods of slow growth. This contributes to some hesitancy, although we believe the current cycle is at the bottom of a multi-decade upswing.
Margins
Despite its market-leading position, the company’s margins have declined consistently during the last decade, with a clear acceleration in recent years. BLBD has faced competitive pressures and softening demand due to budgetary constraints, limiting its ability to develop margins positively.
Following the restructuring exercise, and alongside industry tailwinds, the company is primed to see margin improvement rapidly in the coming years. We believe this shift in bargaining power toward BLBD should allow it to exceed its decade-high margins, or at least match this level, within the coming 5 years.
Quarterly results
BLBD’s recent performance has been impressive, with top-line revenue growth of +34.1%, +82.4%, +44.4%, and +42.8%. In conjunction with this, margins have improved, with an EBITDA-M >5% in its last 2 quarters.
The company’s strong performance is a reflection of a “return to normal” post-pandemic, with demand coming back online as Government spending expands and schools are back to capacity. As the following illustrates, its backlog is now wholly FY23, with old levels unwound. This leads to the second point, which is that the business has successfully initiated price increases, and at aggressive levels, allowing for both volume and price to drive revenue growth. BLBD is seeing minimal downside issues with this pricing approach, further cementing our view that its position is now strengthened.
Balance sheet & Cash Flows
BLBD’s balance sheet is reasonably placed, with an ND/EBITDA ratio of 3.9x and interest comprising 2% of revenue. As margins rapidly expand in the coming years, this will quickly diminish to a small level.
This conservative capital approach positions the business well to raise distributions in the coming 24 months, once profitability and demand are sufficiently healthy and macroeconomic conditions improve. This represents a secondary lever for shareholders to extract value, particularly if this drives renewed investor interest.
Outlook
Presented above is Wall Street’s consensus view on the coming years.
Analysts are forecasting a bullish period for the company. Revenue is expected to grow at a CAGR of 11% in the coming 3 years, alongside sequential margin improvement.
We consider these assumptions to be broadly reasonable. The company’s commercial position is incredibly strong, with multiple levers to pull from. We expect pricing to remain positive in the near-term, while the benefits from an aged fleet and the EV transition to grow in importance over the coming 5 years, into the next decade. As our margin analysis indicators, we are bullish on improvements.
Industry analysis
Presented above is a comparison of BLBD’s growth and profitability to the average of its industry, as defined by Seeking Alpha (28 companies).
BLBD’s financial performance relative to its peers is currently disappointing, although as we have discussed, the company is at the bottom of an accelerating trend. If we assume the company reaches its forecast level, so an EBITDA-M of ~9% and revenue growth of ~10%, the business would be slightly below the average. In addition to this, however, it is positioned as a market leader, benefits from being counter-cyclical, and has scope for consistent, long-term demand.
Based on this, we see reasonable scope for BLBD to trade at a premium to its peers over the coming years as it delivers on its improvements.
Valuation
BLBD is currently trading at 48x LTM EBITDA and 8x NTM EBITDA. This is a discount to its historical average on a NTM basis.
Usually, we would suggest a discount to its historical average is warranted in a case such as this given the execution risk associated with achieving improvement. This said, we believe there is sufficient visibility over near-term development to price this in with a strong level of confidence. Based on this, we suggest a premium to its NTM average is warranted, suggesting upside.
Further, BLBD is trading at a ~2% premium to its peers on a NTM P/E basis, which again implies upside in our view given the upward trajectory of the company. This financial improvement will quickly contribute to a contraction in its trading multiple, leading to its premium becoming a discount.
Key risks with our thesis
The risks to our current thesis are:
- Significant economic downturn reducing funding for new school bus purchases in the short term.
- Regulatory changes in safety or emission regulations impacting manufacturing processes.
- New market entrants with significant financial capabilities in the new EV market.
Final thoughts
BLBD is a high-quality business in our view. It has significant market share, underpinned by deep expertise and operational capabilities. With the US Buses population materially aged, as well as the industry needing to transition to electric in the coming decade, we expect demand to materially accelerate. This has the secondary benefit of providing BLBD with greater bargaining power, allowing for an improvement in unit economics.
These factors will drive financial improvement in the coming years, which we do not believe is wholly priced in. For this reason, we rate the stock a buy despite the macroeconomic conditions, comforted by its non-cyclical nature.
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