Record Backlog And Zero Emission Demand Will Drive Major Upside Ahead

Catalysts

About NFI Group

NFI Group is a global independent provider of buses and motor coaches, delivering propulsion agnostic mobility solutions and aftermarket support to public and private customers.

What are the underlying business or industry changes driving this perspective?

• Record USD 13.2 billion backlog, high option conversion of 71.8% and an LTM book to bill above 100% provide multi year visibility on production and pricing power, supporting sustained revenue growth and more stable earnings.
• Structural growth in zero emission and low emission transit fleets, reinforced by long duration North American and U.K. government funding, is driving higher average selling prices and mix upgrades, which may expand gross margins and adjusted EBITDA over time.
• Operational normalization after COVID era supply chain disruptions, including sharply reduced high risk suppliers and control of a key seat vendor, is expected to support higher throughput and lower execution risk, with potential improvements in net margins and free cash flow conversion.
• Strategic investments in U.S. and Canadian manufacturing footprints and service centers, combined with tariff pass through mechanisms, position NFI to participate in reshoring and infrastructure spending trends while aiming to protect unit economics, supporting gross profit and return on invested capital.
• High margin, recurring aftermarket business, coupled with a growing installed base of vehicles and upcoming battery replacement work through NFI’s service network, may support resilient revenue and free cash flow that could contribute to deleveraging and earnings growth.

Assumptions

This narrative explores a more optimistic perspective on NFI Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming NFI Group's revenue will grow by 19.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -8.5% today to 7.0% in 3 years time.
• The bullish analysts expect earnings to reach $407.8 million (and earnings per share of $3.31) by about December 2028, up from $-289.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $332.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, up from -3.9x today. This future PE is lower than the current PE for the CA Machinery industry at 19.8x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The large nonrecurring battery recall provision of USD 229.9 million highlights underlying technology and supplier risk in NFI Group's zero emission bus platform. If similar issues or extended safety concerns reoccur, they could trigger further recall costs, damage customer confidence in ZEB deployments and ultimately pressure revenue growth and net margins over the long term.
• XALT's decision to wind down its U.S. battery operations exposes NFI Group to execution risk on securing and integrating alternative long term battery suppliers. If new battery programs face qualification delays, capacity constraints or technical failures, the company could experience production bottlenecks and higher input costs that weigh on deliveries, gross margins and earnings.
• Persistent tariff volatility, including new U.S. Section 232 duties on imported buses and ongoing indirect supplier surcharges, may not always be fully passed through to transit agencies and private operators. Over time this could compress pricing power, erode aftermarket profitability and reduce free cash flow available for deleveraging.
• Heavy reliance on a concentrated public funding environment in North America, combined with signs of local transit budget pressure and potential service cuts, creates structural demand risk. If government grant programs or capital budgets are scaled back after current legislation rolls off, NFI Group's multiyear backlog and option conversion could weaken, lowering long run revenue visibility and adjusted EBITDA.
• The strategy of stabilizing critical but noncore suppliers like American Seating through joint ventures ties NFI Group's operational performance to turnaround success in adjacent businesses. If those restructurings fall short or new supply chain shocks emerge, recurring seat or component shortages could constrain throughput, delay deliveries and limit improvements in return on invested capital and net earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for NFI Group is CA$26.66, which represents up to two standard deviations above the consensus price target of CA$20.42. This valuation is based on what can be assumed as the expectations of NFI Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$26.66, and the most bearish reporting a price target of just CA$17.01.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $407.8 million, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of CA$13.14, the analyst price target of CA$26.66 is 50.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.