Strategic Shifts And Federal Support Drive Electric Bus Maker's Financial Upturn

Key Takeaways

• Strategic partnerships and lean manufacturing investments are poised to enhance production efficiency, lower costs, and improve Blue Bird's profitability.
  
• Federal funding for electric buses is expected to significantly boost Blue Bird's order book, supporting long-term revenue growth and profitability in the EV segment.
  
• Dependence on EV sales and federal support, alongside supply chain and labor cost challenges, risks operational expenses and financial stability.

Catalysts

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

• Continued easing of supply chain issues, coupled with strategic partnerships to address component constraints, are expected to improve production efficiency and delivery capacity, positively impacting revenue growth and gross margins.
  
• Aggressive pricing strategies and the shift towards higher margin electric and alternative-powered vehicles reinforce revenue expansion and gross margin enhancement, particularly as these vehicles gain traction with environmental regulations and funding support.
  
• Strategic investments in facility upgrades and the adoption of lean manufacturing processes are aimed at boosting manufacturing efficiency, which should contribute to lower operational costs and improved net margins.
  
• The substantial backlog of firm orders indicates strong demand for Blue Bird’s buses, providing a clear revenue visibility and an opportunity for higher production volumes which directly contribute to revenue growth and profitability.
  
• Federal funding programs, such as the EPA’s Clean School Bus Program and the DOE grant, are catalyzing the adoption of electric buses, significantly increasing the order book for EV buses and potentially enhancing long-term revenue and EBITDA margin through increased sales volumes at potentially higher margins.

Assumptions

• Analysts are assuming Blue Bird's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $142.1 million (and earnings per share of $4.05) by about September 2027, up from $99.5 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 16.9x on those 2027 earnings, up from 16.0x today. This future PE is lower than the current PE for the US Machinery industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.67%, as per the Simply Wall St company report.

Risks

• Supply chain constraints, though easing, still pose a risk to manufacturing efficiencies and could impact net margins through increased costs or production delays.
  
• The reliance on national fleet sales, with longer payment terms, could cause fluctuations in working capital and stress cash flows.
  
• Growth in electric vehicle (EV) sales, while positive, comes with high dependency on continued federal and state support which if withdrawn or reduced could affect revenue projections negatively.
  
• The labor agreement resulting in higher wage increases and the introduction of profit sharing could increase operating expenses, impacting net margins if not offset by price increases.
  
• Investments in expanding production capacity and upgrading facilities carry execution risks and require substantial capital commitment, potentially affecting free cash flow and net margins if returns are delayed or lower than projected.

Valuation

• The analysts have a consensus price target of $62.0 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 $72.0, and the most bearish reporting a price target of just $48.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $142.1 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $49.34, the analyst's price target of $62.0 is 20.4% 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.