68% Expected return with this school bus manufacturer

📈 Trade Details

Considering a straight stock purchase of $BLBD at $44.15 (the price at the time of writing). 

🎯 What do we expect?

If the expected earnings growth materializes, the expected return is 68% by 2026 or 30.12% annualized. This gives us a solid margin of safety to work with.

🗒️ Quick Company Summary

NASDAQ Ticker: BLBD

Blue Bird Corporation ($BLBD) is a manufacturer and seller of school buses and related parts, operating primarily in the United States, Canada, and internationally. The company designs, engineers, and produces various types of buses, including Type C, Type D, and specialty buses. They also offer alternative fuel applications, including propane, gasoline, compressed natural gas, and electric-powered school buses.

💰How does the company make money?

Here is the summary by-product from the latest Quarter and YoY growth

🔥 What’s trending in the news right now?

1. Record Financial Performance:

   • Blue Bird reported its best-ever profit for a quarter, achieving an adjusted EBITDA of $48 million with a margin of 14.5% in Q3 of fiscal 2024.

   • Net revenue reached $333 million, a 13% increase compared to the previous year, driven by higher pricing and a rich mix of electric and alternative-powered buses.

2. Strong Demand for School Buses:

   • The company has a firm order backlog of over 5,200 units, valued at approximately $775 million.

   • Net orders for Blue Bird buses through the first three quarters of the year were 10% higher than the same period last year.

3. Electric Vehicle (EV) Growth:

   • Blue Bird sold 204 electric buses in Q3, representing a 38% increase year-over-year and accounting for 9% of total unit sales.

   • The company has a record backlog of 567 EVs, worth more than $180 million in revenue.

4. Government Funding:

   • The company is benefiting from the EPA's $5 billion Clean School Bus Program, which is expected to significantly boost orders and deliveries in fiscal 2025 and 2026.

5. Collective Bargaining Agreement:

   • Blue Bird successfully negotiated a three-year collective bargaining agreement with the United Steelworkers Union, which includes wage increases and profit-sharing for employees.

6. Future Outlook:

   • The company raised its full-year guidance for adjusted EBITDA to $175 million, doubling the previous year's record results.

   • Blue Bird also announced plans for a new 600,000-square-foot production facility for electric and Type D buses, supported by an $80 million grant from the Department of Energy.

7. Leadership Transition:

   • CEO Phil Horlock announced his retirement, effective at the end of the fiscal year, with Britton Smith set to take over as CEO.

🎯 What analysts think (Stock Price Forecast in 1 YR):

Avg. Price: $61.43 (+39%)
Lowest Price: $48(+8%)

Analysts are bullish about the stock; even the lowest estimate is 8% growth from current prices.

Historically, the stock has traded below analyst targets, but the company consistently beats analyst expectations:

🎯 What do financial models think:

Avg. Price: 51.74 (+17%)

Breakdown by Model:

🕰️ Historical Performance vs. S&P500 ($10k Investment)

Here is the summary of your returns if you invested $10,000 in BLBD vs. S&P 500 since 2021. 

🔮 Future Earnings Expectations

Analysts expect earnings to pick up in Q2 and Q3 next year.

🚚 Key Drivers of Future Growth

1. Record Profitability:

   • Blue Bird achieved an all-time record profit in Q3 2024, with an adjusted EBITDA of $48 million, reflecting a margin of 14.5%, which is more than 4 percentage points higher than the previous year.

2. Strong Demand and Backlog:

   • The company reported a firm order backlog of over 5,200 units, valued at approximately $775 million. This represents nearly seven months of sales at the current rate, indicating strong future revenue potential.

3. Increased Pricing Power:

   • The average selling price per bus increased by 13% year-over-year, contributing significantly to revenue growth despite a slight increase in sales volume (2,151 units sold, up by only 14 buses from the previous year).

4. Electric Vehicle (EV) Sales Growth:

   • Blue Bird sold over 200 electric buses in Q3, a 38% increase from the previous year, representing 9% of total unit sales. The company has a record backlog of EV orders, driven by the EPA's Clean School Bus Program.

5. Operational Efficiency:

   • The company has implemented lean manufacturing processes and upgraded facilities, which have improved manufacturing performance and efficiency.

6. Alternative Powered Vehicles:

   • Approximately 59% of total unit sales in Q3 were alternative-powered vehicles, reinforcing Blue Bird's leadership in this segment and contributing to higher profit margins.

7. Federal Funding Support:

   • The EPA's $5 billion Clean School Bus Program has provided substantial funding for electric and alternative-powered buses, enhancing demand and sales.

8. Cost Management:

   • Despite facing some inflationary pressures, Blue Bird has been able to manage costs effectively, with pricing actions helping to offset increases in material and labor costs.

9. Collective Bargaining Agreement:

   • The recent agreement with the United Steelworkers Union is expected to stabilize labor costs and improve workforce morale, which is essential for maintaining production efficiency.

10. Future Growth Initiatives:

    • Blue Bird has been awarded an $80 million grant from the Department of Energy to expand production capacity for EVs, which will further enhance growth potential.

🐂 Key Bullish Arguments

1. Strong Top-Line Growth:

   • Blue Bird has experienced strong double-digit revenue growth in 2024, driven by high demand for electric vehicles (EVs) and favorable pricing.

2. Favorable Pricing and Product Mix:

   • The company achieved a 13% increase in average selling price per bus, contributing to revenue growth and improved margins. The mix of higher-margin alternative-powered vehicles is expected to further enhance margins.

3. Federal Funding Support:

   • The allocation of approximately $5 billion under the EPA's Clean School Bus Program is anticipated to fuel long-term revenue growth, with significant funding still available.

4. Strong Order Backlog:

   • Blue Bird's backlog is valued at $775 million, reflecting over 5,200 buses, indicating robust future sales potential.

5. Growth in EV Orders:

   • Order bookings for EVs grew by 38%, resulting in an EV order backlog of 567 units, worth about $180 million.

6. Operational Efficiency:

   • Continued focus on operational efficiency is expected to support margin growth, with adjusted EBITDA margin reaching 14.5% in Q3 2024.

7. Attractive Valuation:

   • The stock is trading at a significant discount to its historical average P/E ratio, currently at 14.74, compared to a five-year average of 30.25.

8. Future Expansion Plans:

   • Blue Bird has been awarded an $80 million grant from the Department of Energy to expand production capacity, which will help meet anticipated demand growth.

9. Strong Market Position:

   • Blue Bird is a leading manufacturer in the school bus industry with a strong presence across North America, positioning it well to capitalize on growing demand for clean and alternative-powered buses.

10. Positive Earnings Performance:

    • The company's adjusted EPS more than doubled to $0.91, beating consensus estimates, reflecting strong financial performance.

🐻 Key Bearish Arguments

1. Topline Growth Vulnerability:

   • If the company's topline growth falters, it could lead to volume deleverage, negatively impacting margins and overall profitability.

2. Dependence on Federal Funding:

   • Blue Bird's future growth is significantly tied to federal funding programs like the EPA's Clean School Bus Program. Any changes or delays in funding allocations could adversely affect sales.

3. Inflationary Pressures:

   • Rising labor and material costs could offset the benefits from strong pricing and a favorable product mix, impacting profit margins.

4. Market Competition:

   • The school bus industry is competitive, and Blue Bird may face challenges from other manufacturers, especially as the market shifts towards electric and alternative-powered vehicles.

5. Regulatory Risks:

   • Changes in environmental regulations or policies could impact the demand for certain types of buses, particularly if incentives for alternative-powered vehicles are reduced.

6. Supply Chain Disruptions:

   • Any disruptions in the supply chain could affect production schedules and delivery timelines, potentially leading to lost sales and customer dissatisfaction.

7. Execution Risks in Expansion Plans:

   • While Blue Bird has plans for expansion, execution risks related to scaling production capacity and meeting demand could pose challenges.

8. Economic Conditions:

   • Broader economic conditions, including recessions or downturns in public funding for education, could adversely affect demand for school buses.

9. Technological Changes:

   • Rapid advancements in technology may require continuous investment in R&D to stay competitive, which could strain financial resources.

10. Customer Concentration:

    • A significant portion of sales may come from a limited number of customers, which could pose risks if any major customer reduces orders or switches to competitors.

Risks Highlighted by Management in the latest Earnings Call:

Summary Table of Key Risks

Conclusion

I don’t think EV mandates across the U.S. and Canada are going away, so although that is a risk, it is quite unlikely to materialize. Even if the demand for EV buses goes away, the company has a massive backlog of buses to build and sell to existing customers. Improvements in manufacturing are starting to reflect themselves in improved margins. The ability to increase prices without losing demand is a great example of the pricing power the company has in the market. Overall, it's a great, boring business with a good valuation and strong growth potential.

Disclaimer
I currently do not have an active position in any of the companies mentioned above but am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith, however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.

Happy Investing,
Andy