Putting The Brakes On Blue Bird Corporation (NASDAQ:BLBD)

Around three months ago, in March of this year, I decided to analyze Blue Bird Corporation (NASDAQ:BLBD). For those not familiar with the company, it is a producer and seller of school buses and parts related to school buses. This includes alternative powered products such as ones that are fueled by propane, gasoline, and even electric. At that time, there was a lot of uncertainty about any company in the electric vehicle space. Consumer demand was showing signs of weakening, companies in the electric vehicle market were cutting back on investments in the space, and competitive pressures were pushing prices down.

Despite all of these troubles, I maintained at that time that Blue Bird was an attractive opportunity. The company was achieving rapid revenue growth and forecasts for the future looked positive. On a forward basis, the stock looked attractively priced. At the end of the day, I ended up rating the business a ‘buy’ to reflect my view that shares would likely outperform the broader market for the foreseeable future. But even then, I was underestimating the company’s potential. Shares have skyrocketed by 70.7% since then. That’s well above the 3.5% increase seen by the S&P 500 over the same window of time. This move higher has been driven in part by strong fundamental performance and in part by management’s decision to increase guidance for the current fiscal year and for the future.

This is great news for shareholders, but it’s also important to keep in mind that upside doesn’t last forever. The market has come to realize the value that the company has. To be clear, I think that, in the long run, the stock will do just fine. But I no longer think that upside is tremendous compared to what it was previously. Given this, I think that downgrading the company to a ‘hold’ is a prudent idea.

Great performance

Fundamentally speaking, Blue Bird has been doing really well as of late. When I last wrote about the company, we only had data covering through the first quarter of the 2024 fiscal year. Today, that data now extends through the second quarter. For that quarter, revenue totaled $345.9 million. That’s 15.4% above the $299.8 million generated one year earlier. Even though Parts related revenue for the company increased during this time, that rise was only 6.1%, taking those sales up from $26.3 million to about $28 million. The real revenue came from the Bus segment, with revenue skyrocketing by 16.3% from $273.5 million to roughly $318 million. This occurred even as the number of units sold by the company fell by 2.2% from 2,305 to 2,254. It was really thanks to an 18.8% surge in sales price per unit. Most of that rise, according to management, was attributable to price increases that the company implemented, though changes in product and customer mix also contributed by an unspecified amount.

With the rise in revenue for the company also came higher profits. Net income, for instance, shot up from $7.1 million to $26 million. Operating cash flow more than doubled from $24.8 million to $54.6 million. And if we adjust for changes in working capital, we get a near tripling from $11.9 million to $31.1 million. Meanwhile, EBITDA for the business expanded from $21.1 million to $45.8 million. The second quarter of this year was, in no way, a one-off for the company. In the chart below, you can see financial results covering the first half of 2024 relative to the same time of 2023. Revenue, profits, and cash flows, all increased year over year. It is worth noting that while the company did see a unit decline in the second quarter of this year, unit sales were strong enough in the first quarter to put year to date unit volumes up by 2.9%.

So strong has been financial performance that management has even decided to raise guidance for the year. Previously, the company was forecasting revenue of between $1.15 billion and $1.25 billion. This was the guidance that came out in the first quarter of 2024, which itself represented an increase in expectations compared to when guidance was originally provided when management announced financial results for the final quarter of last year. Now, however, management is anticipating sales of between $1.275 billion and $1.325 billion. At the midpoint, that’s 8.3% higher than prior guidance. It’s also 14.8% greater than the $1.13 billion the company generated in 2023.

On the bottom line, it’s expected for profitability to improve also. As an example, EBITDA is now anticipated to be between $145 million and $165 million. That’s a nice chunk higher than the $120 million to $140 million range previously anticipated. Other estimates were not provided, from what I can see. But if we assume that adjusted operating cash flow will rise at the same rate that EBITDA is expected to at the midpoint, then we would anticipate that metric climbing to about $85.2 million.

Taking these figures, we can then value the company as shown in the chart above. This includes the utilization of historical results for 2023 and the forward estimates I provided for 2024. On a forward basis, the company doesn’t look that bad. I wouldn’t exactly call it undervalued at this point, but it’s certainly not overvalued. Of course, we should be focused on the longer-term outlook as well. The fact of the matter is that management is very optimistic about what the future holds.

When it comes to the current fiscal year, management expects to produce around 8,800 buses this year. That’s up from the 8,514 it produced in 2023. Around 800 of these are expected to be fully electric. That’s a nice increase compared to the 546 that the company reported for last year. It looks as though there should be an increase in gas and propane vehicles as well, though management does not detail by exactly how much. However, this is not the end of the company’s growth journey. If anything, it’s only the beginning. Although management has not set a firm year for this, they did say that long-term production should grow to between 11,000 and 12,000 buses annually. This will occur as diesel buses eventually become a thing of the past. Upon achieving this goal, the company estimates that between 4,000 and 5,000 of the buses it produces annually would be all electric.

This should translate to significant revenue growth. For that long-term outlook, the company is forecasting between $1.85 billion and $2 billion annually in revenue. In addition to this, its EBITDA margin is expected to grow to between 13.5% and 14%. That’s up from the 12% anticipated for this year, and it compares nicely to the 12.5% in long-term guidance, on the high end of the range, anticipated just one quarter earlier. Should this come to fruition, we would be looking at EBITDA of between $250 million and $280 million annually. As the chart below illustrates, this would mean a forward price to adjusted operating cash flow multiple for the company of between 11.8 and 13.2. Meanwhile, the EV to EBITDA multiple would be between 6.5 and 7.3. Should this come to pass in the next few years, that could translate to some rather impressive upside. But seeing as how this is more of a long-term outlook as opposed to the short term or midterm, the upside achievable at this point might be minimal on an annualized basis.

This growth is due to a couple of factors. For starters, management has been investing heavily in transforming its business. For this year, for instance, the company intends to have around $240 million in funds to allocate. This is based on projected operating cash flow of $158 million. While this is substantially higher than the $85.2 million that I used for my evaluation of the company, management makes clear that its estimate factors in working capital adjustments. For context, in 2023, operating cash flow was $119.9 million. But when you strip out working capital, that figure dropped substantially to $48.3 million. So I don’t think that my estimate is inappropriate. Their estimate also excludes research and development from the equation. So that makes it even more disconnected from my estimate. Regardless, with these cash proceeds, management expects to spend around $75 million, or less, on research and development, capital expenditures, and joint venture investments. Another $30 million to $60 million is going to be allocated towards share repurchases. The company also plans to boost its cash to as much as $100 million while also paying down $40 million worth of debt. So that should definitely place it in a stronger position.

As for the industry more broadly, the investments made by the company are part of a bid on a growing market for school buses. During the COVID-19 pandemic, schools slashed their investments in school buses. But that’s only a temporary thing. After all, as I pointed out in my prior article on the company, 43% of the school bus fleet in North America is 10 years of age or older. A small number of these buses are 35 years old. Because of the pandemic, the number of school buses sold plummeted from 36,100 in 2019 to 25,700 in 2022. This year, the industry is expected to result in 33,000 new buses coming onto the market. And by 2029, we are looking at about 40,500 being produced.

Also benefiting the business should be significant government investments in the electrification of vehicles. Across three separate programs, we are looking at no less than $2.165 billion in funds being allocated. Management estimated that Blue Bird should win around 30% of the orders placed with these funds. That would translate to roughly $649.5 million in revenue spread over the time that the funds are paid out.

Takeaway

Operationally speaking, I am a big fan of Blue Bird. I think that this is a fantastic company with great potential in the long run. Having said that, I think that further upside from here would be more modest. Shares are not unreasonably priced, but they also aren’t anywhere near as cheap as they were previously. If new guidance comes out in subsequent quarters that changes this assessment, I could become more bullish on the business. But given where the stock is priced right now, I think downgrading the firm to a ‘hold’ is the proper idea.