Only long-term investors looking for a stable company with consistent dividend yield should consider entering New Flyer Industries Inc. (TO:NFI)) stock at current levels
New Flyer Industries Inc. is North America’s largest manufacturer of transit buses and motor coaches, with 31 fabrication, manufacturing, distribution, and service centers across Canada and the U.S. New Flyer Industries has been delivering consistent operating and financial performance over the past three years, which in turn has driven the stock price more than 100% since the acquisition of MCI in November 2015. However, its share-price performance over the next year could be muted as the current price of $49.07 implies a PE of 15.6x, which seems fairly valued given the consensus EPS estimates of a 11% increase in EPS to $3.07 for fiscal 2017. Only long-term investors looking for a stable company with consistent dividend yield should consider entering the stock at current levels.
Investment thesis
- Largest manufacturer of transit buses and motor coaches in North America
- Consistently increasing dividend payout but dividend yield has declined due to sharp up-move in stock price
- High order backlog
Leader in North American transit bus and motor coach manufacturing
New Flyer Industries is the largest transit bus and motor coach manufacturer in North America, with respective market shares of 45% and 39% in 2016. The Company offers transit bus product line under the brand Xcelsior (offered in 35’, 40’, and 60’ lengths with lean diesel, natural gas, diesel-electric hybrid, trolley-electric, and battery-electric propulsion options) and supports over 44,000 heavy-duty transit buses currently in service. NFI’s coach offerings include Motor Coach Industries Inc. (MCI) J-Series (best-selling intercity coach for 11 consecutive years), and the MCI D-Series (best-selling motor coach line in North American history) and supports 28,000 coaches currently in service.
New Flyer Industries is also the largest aftermarket parts and service supplier in North America, operating NFI Parts™ that provides parts, technical publications, training, and support for its OEM product lines. NFI and MCI have established relationships with nearly all domestic transit authorities and currently sell to 24 of 25 of the largest agencies.
Consistently increasing dividend payout
Strong free cash flows have allowed New Flyer Industries to consistently pay dividends and increase payout over the past three years. From ~$0.58 in 2015 to a projected $1.30 per share in fiscal 2017, the dividend payout has increased at a CAGR of nearly 50%. At the current market price of $49.07, the dividend yield works out to 2.6%, which is lower than ~4.5% in fiscal 2015 due to a sharp run up in stock price.
Organic and inorganic expansion to drive future growth
New Flyer Industries has made four acquisitions between 2010-2015, including the largest MCI acquisition in 2015 that has significantly expanded its business operations. Going forward, the Company plans to invest in new product development, lean manufacturing and vertical integration of critical supply whilst remaining open for additional acquisitions.
As part of its organic expansion, New Flyer Industries plans to make further investments in MCI facility upgrades, the recently-opened Vehicle Innovation Center in Anniston, AL (focused on development of electric, autonomous drive and telematics for buses); service center enhancements, and next generation product development (MCI’s new D-model coach, battery-electric coach and a 35-foot J-model coach). As part of its strategy to boost in-house production of components, the Company invested $40 million last month to upgrade a facility for bus parts fabrication in Shepherdsville, Kentucky. The facility will provide fabrication and parts to support all three NFI Group business entities: New Flyer, MCI and NFI Parts.
High order backlog and consistent delivery
Favourable market conditions continue to drive NFI’s order book. For 2017, the Company is projecting 3,800 EU (equivalent units) firm orders, up 289 from 3,511 EU in 2016 and up more than 1,300 from 2,480 EU in 2015. Book-to-bill ratio, the ratio of orders received to units shipped and billed, has been consistently above 100% for 18 of the last 19 quarter, with LTM ratio coming in at 128%.
Financial analysis
Although listed on the TSX, New Flyer Industries reports its financial results in USD as 90% of its revenues are derived from the U.S. Leveraging its market leadership position and favourable market demand for transpiration, New Flyer Industries has been delivering strong growth in revenues and profitability over the past three years. For fiscal 2016, revenues increased 48% to $2.3 billion while adjusted EBITDA and net income increased 91% and 132%, respectively. For the third quarter of fiscal 2017, total revenues increased 6% to $542 million while adjusted EBITDA and net income increased 11% and 33%, respectively. The increase in fiscal 2016 earnings over 2015 was primarily the result of the addition of MCI operations, which were acquired in late 2015.
Outlook and valuation
New Flyer Industries is a fundamentally-sound company with market leadership position in transit buses and coaches, and has been delivering consistent financial performance over the past few years. The Company’s stock price has also mirrored this, more than doubling from the levels of $20 at the time of MCI acquisition in November 2015.
For fiscal 2017, New Flyer Industries has guided ~3,800 EUs (8.2% over fiscal 2016) of new transit buses and motor coaches and a capex of ~$55 to $65 million, which should result in EPS growth of ~11.0% according to consensus estimates. At the current price of $49.07 on the TSX, the stock trades at a PE of 15.6x, which seems fairly valued with consensus EPS estimates of a 11% increase in earnings to $3.07 for fiscal 2017. Only long-term investors looking for a stable company with consistent dividend yield should consider entering the stock at current levels, as strong returns of more than 100% witnessed over the past two years should not be expected at least over the next year.