Glenn Rogers'  Instablog

Originally recommended on June 16/08 (IWB #2822) at C$12.30, US$11.69. Closed Friday at C$11.91, US$11.47.

I first recommended this income deposit security (IDS) in June, 2008 when it was trading at C$12.30 and last updated it on Dec. 14/09 when it had fallen to C$9.79. At that point was yielding over 11%. I reiterated my Buy recommendation at that time and I'm going to do so again. 

The company, which manufactures buses, continues to build a strong backlog of orders and has been dependably paying monthly distributions of 9.75c per stapled unit ($1.17 a year) which appear to be sustainable going forward. The units closed the week at C$11.91 so the yield is now down to 9.8%. But anyone seeking cash flow should be very happy with that return in this environment. 

The major concern is that municipalities in the U.S. are cash-strapped so it's likely that some of them will be slower to replace their aging bus fleets. However, the company is essentially sold out for the rest of this year in terms of production commitments. I believe there is going to continue to be a slow but steady move towards increased public transportation and since New Flyer can provide natural gas and hybrid powered buses alongside its diesel fleet it is in a good position to benefit from this long-term trend.

New Flyer's aftermarket operating segment experienced an increase in sales in the Canadian market but some reduction in U.S. sales during the second quarter. Although the U.S. market appears to be contracting somewhat, management believes New Flyer's aftermarket segment will continue to maintain its market share. In response, New Flyer has extended product and service offerings and focused on cost reductions to improve its competitive position and management has increased the external sales force. Management is also identifying opportunities to provide new value-added service offerings and alternative supply chain solutions to assist customers and maintain market share.

In a way this is like buying a high-yield bond. The units have traded in a relatively narrow range between $9.50 and $12 over most of the past year and the distribution has remained steady for the past five years.

Action now: Buy with a target of $13.