Record Backlog And Diverse Bus Models Will Drive Production Efficiency

Key Takeaways

• Strong order backlog and propulsion-agnostic strategy position the company for revenue growth and market share capture across changing demand types.
  
• Favorable North American market conditions and strategies to protect margins may enhance future earnings despite trade uncertainties.
  
• Supply chain issues, tariffs, and increased competition could hinder production and profitability, while uncertain funding and market demand affect revenue growth and margins.

Catalysts

Manufactures and sells buses in North America, the United Kingdom, rest of Europe, and the Asia Pacific.

• NFI Group's record backlog, with orders valued at $12.8 billion, indicates strong future revenue growth as these orders are fulfilled.
  
• The company's propulsion-agnostic approach, offering a wide range of bus models and propulsion types, positions it well to capture market share regardless of shifts in demand from zero-emission buses to traditional engine types, potentially boosting revenue and margins.
  
• An expected improvement in supplier performance, specifically diversifying seat suppliers, is likely to reduce manufacturing disruptions, improving production efficiency and contributing positively to future earnings.
  
• The ongoing high demand in North American public transit markets, alongside a reduced number of competitors in some bid processes, may lead to favorable pricing dynamics, enhancing net margins.
  
• The U.S. government's tariff policies and the potential for passing on those costs through contracts could protect the company's margins in the face of trade uncertainties, thus stabilizing future earnings.

NFI Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NFI Group's revenue will grow by 17.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.1% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $298.3 million (and earnings per share of $2.69) by about April 2028, up from $-3.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.4x on those 2028 earnings, up from -306.7x today. This future PE is lower than the current PE for the CA Machinery industry at 25.1x.
• 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 9.11%, as per the Simply Wall St company report.

NFI Group Future Earnings Per Share Growth

Risks

• Continued supply chain disruptions, notably with seat suppliers, could impact NFI Group's production schedules, leading to delayed deliveries and increased working capital requirements, affecting liquidity and operational margins.
  
• The potential implementation of 25% tariffs on U.S.-Canada shipments and the corresponding counter-tariffs could significantly impact NFI Group's production costs for North American operations, thereby affecting gross margins and profitability.
  
• Uncertain funding dynamics from the U.S. government, especially toward zero-emissions vehicles, could impact future order volumes and product mix, potentially resulting in decreased revenue from public transit markets.
  
• Increased competition, highlighted by the entry of new competitors like Solaris in North America, could erode market share and pressure NFI Group's pricing strategies, thus impacting revenue growth and competitive positioning.
  
• The weakened U.K. market demand and lower-than-expected deliveries from Alexander Dennis may negatively affect international revenue streams and overall profit margins, given the lower profitability of this segment compared to North American operations.

Valuation

• The analysts have a consensus price target of CA$19.731 for NFI Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$25.23, and the most bearish reporting a price target of just CA$12.51.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $298.3 million, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of CA$11.77, the analyst price target of CA$19.73 is 40.3% 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.