- Amid a crash in EV plays, and following a soft fourth quarter earnings report, Blue Bird stock has pulled back sharply.
- On its face, the sell-off has some logic, as BLBD hardly looks cheap at the lows.
- But the market is focusing on near-term pressures on a cyclical business, while ignoring still-intact long-term tailwinds.
- We've seen this reaction before, and it presented a buying opportunity. This time does not seem different.
Since Nov. 16, Blue Bird (NASDAQ:BLBD) stock has declined 38%. There are two core explanations for the plunge.
The first is that stocks like BLBD generally have struggled. While broad indices continue to hold up, we've certainly seen pockets of the market fall precipitously over the past month and a half. In that context, Blue Bird's long-term exposure to the electric bus market easily could be seen as a negative in a market selling off seemingly any and all electric vehicle plays.
Closer to home, Blue Bird's fiscal fourth quarter report last month admittedly was close to disastrous. Revenue for Q4 was 18% below Street consensus (to be fair, a consensus based on just a two-analyst estimate). The outlook for fiscal 2022 looks soft, and Blue Bird followed the report with a $75 million private placement at $16 that increased its share count by about 17%.
But it's important to remember that both the soft trading and the soft results are driven largely by short-term factors mostly beyond Blue Bird's control. There's little, if any, evidence that long-term school bus demand or Blue Bird's competitive position has changed.
It's also important to remember that we've been here before. Amid the market sell-off last spring driven by the novel coronavirus pandemic, BLBD stock fell below $10. That sell-off created an opportunity. This one seems likely to do the same.
The Case Against Blue Bird Stock
Fundamentally, there's a pretty simple case against BLBD at the moment, a case that may well have driven some of the selling over the past seven weeks.
This, after all, is a company that posted a seemingly ugly fiscal 2021. Revenue declined 22.2% year-over-year, with unit sales down nearly 25%. Adjusted net income plunged 61%, with Adjusted EBITDA falling 38%. And it's not as if fiscal 2022 necessarily gets that much better. The midpoint of guidance still suggests weakness relative to pandemic-impacted FY20:
Blue Bird, FY22E vs FY20A
|Adj. EBITDA Margin||5%||6.22%||-122 bps|
EBITDA margins are a significant concern in terms of the balance sheet. Blue Bird has burned $82 million in cash over the past two fiscal years, which has led debt to balloon and required the dilutive $75 million equity sale. Even pro forma for that capital raise, Blue Bird has net debt of $128 million, 3.2x the midpoint of FY22 EBITDA guidance.
Considering input cost and wage inflation, 5% EBITDA margins and 3.2x leverage are significant concerns. Blue Bird's amended credit facility gives it reasonable room this year, with minimum required EBITDA (subject to adjustments) of $20 million, against guidance for $30 million to $50 million (on a slightly different basis). But simple math suggests it doesn't take all that much — either a further decline in revenue or more pressure on margins in an obviously inflationary environment — for balance sheet concerns to become more pressing in the not-too-distant future.
To top it all off, aside from these concerns the equity doesn't look all that cheap. A market cap right at $500 million (again, pro forma for the private placement) suggests an enterprise value of $628 million. That's nearly 16x the midpoint of FY22 EBITDA guidance, and a whopping 58x FY21 adjusted net income. (Blue Bird hasn't guided for that metric in FY22; the Adjusted EBITDA projection suggests a modest profit depending on how taxes play out, but one analyst does estimate a loss next year.)
And so there are some reasons for the sell-off. It appears analysts agree, as it looks like Roth Capital cut its price target to $13 from $21, with Craig-Hallum going from $30 to $25. Fundamentally, there legitimately isn't all that much to like here.
An Absolute Mess
But investors should bear in mind a simple fact: basically everything is going wrong for Blue Bird at the moment. Production right now is close to a disaster. Chief Executive Officer Matthew Stevenson said on the Q4 conference call that "in many instances, we are missing over 25 parts per bus" during production. Stevenson added that Blue Bird estimated that more than 2,000 units would have been delivered in FY21 without these supply chain challenges. That figure, somewhat incredibly, is about 30% of total deliveries for the entire year, and nearly equal to the 2,199-unit decline relative to FY20.
Even when parts are available, raw material costs have soared, notably for steel and aluminum. Like most other companies in the U.S., Blue Bird faces labor and wage challenges. And the pandemic led school districts, many of which had closed facilities, to pause orders into the first half of calendar 2021.
In that context, FY21 performance doesn't look that bad. Indeed, looking at the 'walk' from FY20 to FY21, in context it actually appears somewhat impressive:
Volume declines and cost inflation provided a headwind equal to more than two-thirds FY20 Adjusted EBITDA. Yet Blue Bird managed to find a reasonable amount of savings to keep profits at least somewhat intact.
FY21 was a hugely difficult year for Blue Bird. There's no doubt about it. But it's an error to assume that the year was difficult because of execution missteps or competitive problems. It's an even larger error to value BLBD stock based off that highly difficult year.
The Cycle Will Turn
An investor might think that Blue Bird is a relatively defensive play. School bus demand seemingly exists irrespective of macroeconomic factors. Buses get driven, they need to get repaired, they need to get replaced.
But as I wrote last year, that's not necessarily the case. Over time, demand has ebbed and flowed, with property tax revenues the key factor before the novel coronavirus pandemic:
source: proxy statement for Hennessy Capital, Blue Bird predecessor, filed September 2014
Obviously, this time around, the factor has been the pandemic. Buses didn't need to be replaced because they weren't in service, and particularly in calendar 2020, school boards were tightening their belts amid the most uncertain environment in modern memory. Demand hasn't fallen quite as sharply as it did during the financial crisis, but there has been a clear pullback:
source: Blue Bird FY21 10-K
As it always has in the past, the cycle will turn back positive. In terms of orders, it already has. Blue Bird has reiterated of late that demand is strong, and the backlog going into FY22 supports that claim. Blue Bird has a backlog of over 4,200 units heading into FY22, about 40% of unit sales in FY19, the company's most profitable year since before the financial crisis. The school bus fleet is aging, and while demographic trends aren't hugely in favor of the company, overall school-age population in the U.S. should grow enough to keep demand at worst intact. (The supposed urban exodus of 2020 appears to be reversing somewhat, but increased suburban population would be a mid-term plus for Blue Bird as well.)
And it's important to note that there is little evidence that the decline in earnings from FY19 to FY22 is driven by anything other than the cycle. Navistar, now part of Traton SE (OTCPK:TRATF), claimed a 460 bps improvement in market share for its IC Bus business between its fiscal 2018 and fiscal 2020, but it's unclear to what extent the FY20 delivery numbers were impacted by supply chain issues. The other core competitor, Thomas Built Buses, is owned by recently spun-off Daimler Truck (OTC:DTRUY), and its financials suggest pressures similar to those faced by Blue Bird.
All told, a big part of the bull case for BLBD stock is that, in the long run, the financials of the last two years really don't matter all that much. Certainly, pandemic-driven reductions in demand and supply chain-driven increases in costs have led to the loss of a few million dollars in profit — not immaterial against a ~$500 million market cap. But orders are not being lost to competitors or secular market changes; they've simply been delayed. The market will return to its 30K-plus annual average and beyond in the mid-term, and there's little reason to believe that, as the industry returns to normalcy, Blue Bird's profits will do the same.
Tailwinds On the Way
To be sure, input cost and labor inflation may be here to stay. But Blue Bird has responded on that front, launching a variable-price strategy to replace a fixed-cost offering that doesn't quite work in such an uncertain environment.
And from a long-term standpoint, there's a secular tailwind on the way in adoption of battery-electric and 'clean' buses. Blue Bird claims to be the leader in propane-fueled and BEV buses, and at least relative to Thomas Built has a huge advantage. Per the Q4 call, Blue Bird delivered or took orders for 550 electric buses in FY21. According to the Daimler Truck prospectus, as of May, that company had cumulative deliveries of just 50 electric buses.
Meanwhile, the recently-signed infrastructure bill contains $5 billion in spending ($1 billion annually for five years), split evenly between BEV and low-emission models. That's a massive subsidy in a market that appears to be worth in the range of $2 billion annually.
There's another factor to consider as well. As industry figures from the early 2010s suggest, before the pandemic, school bus demand was largely correlated with property tax revenues. That trend changed in the last two years due to school closures — but should return as normalcy does. Rising real estate prices (and thus higher assessments) across the country mean many school districts are flush. The shower of cash from Washington should only improve the near- to mid-term outlook for the industry.
Right now, the situation looks relatively dismal for Blue Bird, with orders below the historical average and costs well above. But that seems exceedingly likely to change for the better, probably relatively quickly. Pricing should ameliorate the cost issues somewhat, particularly as Blue Bird catches up in the second half of FY22. Demand already has strengthened, with external factors providing the potential for an even larger boost.
There is going to be a time in the not-too-distant future when Blue Bird, and its industry, are riding high again. Amid a disappointing earnings report and seemingly soft fundamentals, the market seems to be ignoring that fact.
Valuing BLBD Stock
That leaves two questions. First, what goes wrong?
There are two considerations on that front. In the near term, there's certainly a question of why buy BLBD now. This probably is a 2023 story even if management is right. There's no likely catalyst any time soon, given Blue Bird itself expects a soft first half in FY22. Additional movement in D.C. seems unlikely, and truthfully there probably isn't a need for more than the funds already allocated toward electric and low-emission buses. BLBD might well match the market at best for the next few months.
Longer-term, the big risk is that all of the uncertainty right now is indeed masking an important change that investors can't quite see from the outside. Market share gains for Navistar's IC, could in fact signal a modest reduction in Blue Bird's competitive position during the past few quarters. Blue Bird is the leader in EV buses, but there's also the risk that a company like Arrival (ARVL) makes a big, splashy entrance and takes some share.
In both cases, I'm relatively comfortable taking the risk. U.S. electric competition doesn't seem particularly stiff yet, and it's not as if Blue Bird's plans for the space are aspirational: EVs already are a material portion of the company's order book, with propane another key source of revenue. As for near-term trading, there wasn't an obvious catalyst a year ago, and BLBD nearly tripled off the lows (admittedly in a highly favorable market for leveraged, beaten-down small-caps).
Patience may be required, certainly. But that leads to the second consideration: what, exactly, is BLBD worth? It's a difficult question to answer even in a more normalized environment, given the relatively thin margins and the cyclical nature of the industry.
Last year, I estimated mid-cycle EBITDA for Blue Bird at about $55-60 million, based on post-crisis/pre-pandemic performance. I don't see much reason to change that outlook even after the disappointing performance of the past 7-8 quarters, given the unprecedented nature of the operating environment.
Admittedly, that figure doesn't make BLBD seem compelling at the lows, as it suggests a roughly 11x EBITDA multiple and a high-teens P/FCF on a normalized basis. But it may also be conservative.
As the 'walk' slide above shows, Blue Bird estimated it could have delivered $73 million in EBITDA in FY21 without the supply chain challenges. That figure suggests EV/EBITDA below 9x, and P/FCF around 13x. And, again, it's important to remember that things are likely to get better. Blue Bird itself sees the potential for material growth and margin improvement:
To be sure, the long-term targets of $2 billion in revenue and 11-12% margins seem aggressive. Blue Bird's revenue topped out at just over $1 billion before the pandemic, and low-single-digit market growth suggests a long path toward a doubling of sales, even with electric/low-emission tailwinds.
But directionally, there does seem to be a path toward continued, if likely somewhat uneven, improvement in revenue. And the nature of the model, as well as management's recent ability to find cost savings (even in recent quarters, as the 'walk' shows), does suggest that top-line growth should add bottom-line improvement as well. It's not terribly difficult to see a double from current levels; a market cap of $1 billion would require revenue returning to a new peak (say, $1.2 billion), with EBITDA margins getting toward 9%, in line with the company's estimated normalized range. A 9-10x EBITDA multiple and mid-teen FCF, both in line with pre-pandemic ranges, get the stock in the range of $30.
That process probably takes some time — but it doesn't necessarily take that much time. Demand seems highly likely to remain strong, and once the supply chain issues are worked through, Blue Bird will be able to meet that demand. As long as that happens, the share price should take care of itself.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BLBD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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