Strong Demand And EV Focus Will Stabilize Future School Bus Production

Key Takeaways

• Strong market demand and easing supply chain issues are enhancing Blue Bird's production stability and revenue growth.
  
• Focus on alternative powered vehicles and increased EV deliveries is driving margin improvements and boosting future earnings potential.
  
• Supply chain challenges, reliance on government subsidies, raw material inflation, infrastructure dependencies, and structural changes pose risks to Blue Bird's production and profitability.

Catalysts

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

• Blue Bird is benefiting from strong market demand for school buses, with a backlog of over 4,800 units, 6% above the previous year, and net orders 16% higher than last year. This strong demand is likely to positively impact revenue and pricing stability.
  
• The easing of supply chain issues and improved management of component constraints are expected to enhance production stability, leading to better earnings and potentially improved net margins.
  
• Blue Bird's focus on alternative powered vehicles, including propane, gas, and electric buses, is driving higher margins and owner loyalty. This strategic product mix is likely to support earnings growth and profitability improvements.
  
• The company expects to increase average bus selling prices through 2024 by managing a richer vehicle mix and reflecting current economic conditions, likely resulting in higher revenue and potentially improved net margins.
  
• Growth in EV deliveries, spurred by significant EPA Clean School Bus Program funding, and an expanding production capacity, are anticipated to advance revenue growth, further contributing to Blue Bird's future earnings potential.

Blue Bird Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Blue Bird's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $167.5 million (and earnings per share of $4.92) by about January 2028, up from $105.5 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 14.8x on those 2028 earnings, up from 11.6x today. This future PE is lower than the current PE for the US Machinery industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 1.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

Blue Bird Future Earnings Per Share Growth

Risks

• The company has encountered supply chain challenges, particularly with chassis components, which might continue to affect production stability and impact earnings if not resolved.
  
• The electric vehicle (EV) market heavily relies on government grants and subsidies, such as the EPA's Clean School Bus Program. Any reductions or changes to these funding programs could affect future sales and net margins.
  
• Raw material costs and supplier inflation pressures remain a headwind, potentially increasing costs and impacting net margins.
  
• The balance of orders and deliveries is dependent on the development of charging infrastructure, which could delay revenue recognition if consumers are unable to establish the necessary EV infrastructure in time.
  
• The company is undergoing structural changes and facility upgrades, which entail significant capital expenditures and carry execution risk that could affect free cash flow and profitability if delays or cost overruns occur.

Valuation

• The analysts have a consensus price target of $59.64 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 $71.0, and the most bearish reporting a price target of just $41.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $167.5 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $38.07, the analyst's price target of $59.64 is 36.2% 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.