Blue Bird Corporation Shares: Strong Prices and Stock Set to Fuel Growth (NASDAQ:BLBD)

Thesis

After a strong boost in 2023 from the strong demand environment for Blue Bird Corporation’s (NYSE:BLBD) product, the first three quarters of 2024 posted strong double-digit growth. In my opinion, the company’s earnings should benefit from strong the rise of electric vehicles and higher prices in the short term. While long-term demand should be driven by about $5 billion in federal funding over the next few years. The company’s margin also looks good with strong pricing and continued focus on increasing operational efficiency in 2024 and beyond. The company’s stock is currently trading below its historical average and given a good long-term outlook, I have a buy rating on this stock.

Business overview

Blue Bird Corporation is an American company that, together with its subsidiaries, is primarily engaged in the design, engineering, manufacture and sale of school buses and related parts worldwide. United States, Canada and internationally. This company is a leading manufacturer in the school bus industry and operates primarily through two segments:

• School buses: In this segment, the company offers C-type (conventional), D-type (transit-style) and special buses. The company has alternative fuel options for its buses, such as propane, gasoline, compressed natural gas, and electric power.

• Parts: In this segment, the company offers a wide range of aftermarket parts and services for the maintenance and operation of buses to ensure the reliability of the vehicles.

Blue Bird is known for its innovative and reliable buses with a wide range of models to meet different transport needs. It also has a significant presence in North America with a strong dealer network and sales support services for its customers.

Last quarter performance

Moving into the second half of the year, the company continued its strong double-digit growth as demand for the company’s products remained strong. While volume growth was almost flat year-over-year, with an increase of just 14 buses over the same quarter last year, the revenue increase was mainly driven by higher prices and an improved mix of D-type and electric vehicles. The price was up 13% year-over-year, representing an increase of about $17,000 in the average selling price per bus, leading to a 13.3% increase to $333.4 million in the company’s top compared to the quarter of the previous year.

Strong price performance also helped the company’s margin during the quarter, which, along with benefiting from a strong mix of higher-margin alternative-powered vehicles, led to around 440 bps year-over-year EBITDA margin growth of the company, reaching 14.5% during the year. third quarter of 2024. However, labor and material costs increased during the quarter, partially offsetting benefits from strong pricing and a favorable mix. EBITDA growth during the quarter also benefited the company’s bottom-line performance, as the company more than doubled adjusted EPS to $0.91 from just $0.44 a year ago, beating consensus estimates by 0, $40 in the third quarter of 2024.

Outlook

After a strong 2023, BLBD is headed for another amazing year with decent double-digit growth in the first three quarters of 2024, with mid-teens growth in the last quarter. I expect this strong growth to continue as market demand for the company’s school buses continues to be very strong. This, along with an increase in the share of favorably priced orders, should fuel top-line growth for the company in the coming quarters. The company’s backlog is also strong, currently worth about $775 million through the third quarter of 2024 and reflecting more than 5,200 buses.

In the last quarter, order bookings for electric vehicles, which are part of the alternative energy mix, increased by 38%, leading to an order backlog of 567 units, worth approximately $180 million, i.e. 11% compared to last year. -annual growth. In my view, this high level of delay should drive the company’s sales growth in the coming quarters. While overall demand for EVs remains strong, the company is scaling back its EV sales outlook by about 100 units, mainly due to the EPA’s (Environmental Protection Agency) order schedule and requested delivery schedule, which should wind down against Q4 2024 sales.

The company’s near-term demand outlook looks promising, thanks to strong pricing and an improved mix of alternative-powered vehicles. While the near term looks good, the company is well positioned to benefit significantly from federal funding for clean and green school buses. EPA, which is an agency that provides significant funding to support the adoption of electric and propane school buses under its five-year Clean School Bus Program EPA has allocated $5 billion for electric and propane buses, with about $4 billion of dollars still available to be injected in the coming quarters. In 2023, under this program, EPA is providing approximately $2 billion through two rounds of approximately $965 million and $940 million each. Although the latest round of funding under this program is a lottery-based rebate, the company expects to win about 30 percent of those orders, or 1,900 buses. If the company’s prediction holds true, then this should significantly boost the company’s sales for FY25 as deliveries of these units are expected to begin in mid-2025.

In addition, the IRA (Inflation Reduction Act) also allocated $650 million for electric buses. In my view, this industry will receive a significant amount of investment in the coming years to further support the adoption of clean buses. Given BLBD’s strong market position with a strong presence in North America, the company’s top line should benefit from this funding beyond 2024.

In addition, the company is also focusing on its future expansion plan to meet the expected growing demand in the long term. The company also received an $80 million grant from the Department of Energy to increase EV and total D-bus production, which should help the company expand its school bus capacity from 10,000 to 14,000 buses annually, which should support the company in meeting the anticipated increase in demand in the coming year, leading to long-term topline expansion.

ASSESSMENT

Over the past year, BLBD stock has returned roughly 150% to its investors as the company’s results continued its strong performance throughout the year. The company’s stock is currently trading at a Non-GAAP forward P/E ratio of 14.74 based on FY24 EPS estimates of $3.35. For FY25, with EPS estimates of $3.63, the forward price/earnings ratio is 13.63. Compared to its five-year average P/E of 30.25x, the company’s stock appears to be at a significant discount of more than 50%.

I expect the company’s revenue to continue its strong growth next quarter as demand remains strong for the company’s buses. This should result in volume growth, which, along with the benefit of higher pricing and improved mix of higher margin categories, should help the company drive margin growth in 2024 and beyond. As we can see in the chart above, the company’s margin performance beat the sector median by a significant margin, as the company is strongly positioned in the school bus industry. I expect the company’s margin to continue to grow steadily in the coming quarters and reach its long-term EBITDA margin target of 15%, which should also drive the company’s bottom line, leading to further improvement in the company’s stock valuation in the future.

Risk

The company’s profitability has grown significantly in recent quarters, which has also benefited the company’s bottom line, with last quarter’s adjusted EPS more than double the year-ago quarter. My thesis is based on the expectation that the company will continue this strong performance, driving both margin and profit growth. However, if the company’s top-line growth weakens, this could lead to reduced volume next quarter, negatively impacting margins. Such top-line and margin weakness could put pressure on the company’s bottom line, leading to a deterioration in the stock’s valuation, which may result in the stock underperforming.

Conclusion

As discussed above, the company’s stock is trading at a discount to historical averages. I expect both top and bottom line growth to continue as the demand environment remains strong and the company continues to focus on improving operational performance. The long term also looks promising; therefore, I would suggest buying this stock at current levels.