Clean School Bus Program And New Products Will Transform Future Prospects

Key Takeaways

• Investment in manufacturing and new products is set to improve efficiency and expand revenue, enhancing overall profitability.
  
• Strategic financial actions like share buybacks and debt reduction aim to bolster shareholder value and financial stability.
  
• Policy changes and leadership shifts threaten Blue Bird's growth and revenue in both ICE and EV markets, potentially impacting competitiveness and profitability.

Catalysts

Designs, engineers, manufactures, and sells school buses in the United States, Canada, and internationally.

• The growing backlog of both internal combustion engine (ICE) and electric vehicles (EVs) positions Blue Bird well for sustained revenue growth, with about 4,700 buses in the backlog representing $760 million in revenue.
  
• The expected acceleration in EV sales, driven by programs like the Clean School Bus Program and state-level incentives, should boost revenue, with the company aiming to deliver 1,000 EVs this fiscal year.
  
• Investments in lean manufacturing and selective facility upgrades are likely to improve production efficiency and net margins, contributing to the company's profitability.
  
• The introduction of new, differentiated products over the next 2 to 3 years, including developments in commercial chassis, should expand revenue streams and enhance earnings potential.
  
• Strategic financial moves such as share buybacks and reducing debt are expected to improve shareholder value by enhancing earnings per share and financial stability.

Blue Bird Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Blue Bird's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $161.4 million (and earnings per share of $4.32) by about March 2028, up from $108.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, up from 10.4x today. This future PE is lower than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

Blue Bird Future Earnings Per Share Growth

Risks

• Executive orders by President Trump, including the pausing of EPA and federal funding programs and the potential introduction of new tariffs, could disrupt Blue Bird's sales and profitability, impacting overall revenue and earnings.
  
• Reduced EV mix in sales, which decreased from 10% in the previous year to 6% in fiscal 2025's first quarter, indicates reliance on traditional internal combustion engine vehicles and could limit growth potential if EV funding issues persist, affecting future revenue and margins.
  
• Potential new tariffs on Canadian and Mexican goods, as well as on components sourced from China, may increase costs, requiring Blue Bird to raise bus prices, potentially affecting competitiveness and profit margins.
  
• The pause in federal funding could delay or limit the deployment of approximately 250 EV buses without distributed funds, affecting planned sales volumes and corresponding revenue targets in fiscal 2025.
  
• Changes in leadership, with the CEO stepping down amid several strategic initiatives, could pose execution risks and impact the company's ability to capitalize on its projected growth in both ICE and EV segments, influencing longer-term earnings potential.

Valuation

• The analysts have a consensus price target of $53.0 for Blue Bird 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 $68.0, and the most bearish reporting a price target of just $36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $161.4 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 7.3%.
• Given the current share price of $34.93, the analyst price target of $53.0 is 34.1% 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.