Manufacturing stock is on the mend

NFI Group has a strong outlook. Its share price should recover along with its earnings and cash flow in the months ahead. Meanwhile, it pays an attractive dividend.

We regularly review manufacturing stock Winnipeg-based NFI Group (TSX—NFI). Its shares have fallen reflecting a number of problems.

One problem was COVID-19’s negative effect on public transportation. More of those who still go to work each day would rather drive and avoid catching COVID-19 from others. Ridership fell in many public transportation organizations. This squeezed new orders for transit vehicles.

NFI has faced challenges

A second problem was supply-chain disruptions. NFI says that this impacted “production and parts sales”. Clogged ports are likely to hurt deliveries and sales in Europe and Asia. Then again, the company does 78 per cent of its deliveries in North America.

President and chief executive officer Paul Soubry also cites “inflationary pressures and timing delays in orders”.

Zero-emission rolling stock should sell well

NFI writes that it’s “leading the electrification of mass mobility round the world. With zero-emission buses and coaches, infrastructure, and technology, NFI meets today’s urban demands for scalable smart mobility solutions. . . . It’s a leading manufacturer of mass mobility heavy-duty transit buses, motor coaches, single and double-deck buses, low-floor cutaway and medium-duty buses, as well as parts. It now offers the widest range of sustainable drive systems available, including zero-emission electric (trolley, battery, fuel cell), natural gas, electric hybrid, and clean diesel. In total, NFI supports its installed base of over 105,000 buses and coaches worldwide.”

NFI implemented two strategies to deal with the industry downturn. One was taking cost-reduction initiatives. Mr. Soubry said that this “is providing us with a lower fixed-cost base to improve margins and deliver enhanced returns on invested capital we grow”.

Expansion into international markets

NFI’s second strategy is to continue to expand into international markets. To this end, it acquired UK-based Alexander Dennis Limited (ADL). This company adds to NFI’s seasonal influence. That’s because more of ADL’s deliveries of motor coaches occur in the third and fourth quarters of each year.

Mr. Soubry is optimistic about NFI’s short and long-term outlooks. He says: “We see encouraging signs of market recovery with a significant increase in order activity.” Many more people are fully vaccinated these days. That’s why ridership in some American and British communities is now up by 80 per cent over early 2020 levels. As a result, some governments have made “historic” funding for public transportation.

Mr. Soubry is confident about NFI’s long-term prospects. He said: “NFI projects a growing adoption of zero-emission vehicles over the next 10 to 15 years as operators in North America, the United Kingdom, Europe and Asia Pacific markets transition their fleets to zero-emission vehicles. NFI should profit handsomely.”

In addition, as big cities become more heavily populated, the need for public transportation increases. Too many private vehicles will create traffic gridlock, of course. This, in turn, will lead to ever-longer commute times. One possible antidote is if people scatter to perform remote work in smaller, livable communities.

Numbers are better than they seem

NFI’s numbers look dreadful at first glance. But they’re better than they seem. For instance, the company is expected to return to profitability this year, after losing C$0.93 a share last year. More importantly, its earnings are expected to jump from $0.04 a share this year to C$1.08 a share in 2022. Based on this estimate, the shares trade at a forward P/E (price-to-earnings) ratio of 21.8 times. This beats a P/E ratio of 588.8 times. In 2023, NFI is expected to earn C$2.09 a share. This works out to a better forward P/E ratio of 11.3 times.

NFI’s net debt-to-cash-flow ratio is 12.5 times. That’s far above our standard comfort zone of two times or less. But the company’s cash flow is recovering quickly. In the first half of 2021, it generated cash flow of US$55.9 million. That’s up by nearly 91 per cent from cash flow of $29.3 million in the first half of last year. Higher earnings per share usually lead to higher cash flow per share. We expect NFI’s balance sheet to keep on improving.

NFI pays dividends of C$0.858 a share. This provides an attractive yield of more than 3.6 per cent. These dividends are sustainable. That’s because the company’s earnings are expected to exceed its dividends in 2022 and 2023.

NFI remains a buy for a long-term share price recovery. In the meantime, earn attractive dividends.

This is an edited version of an article that was originally published for subscribers in the November 5, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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