A manufacturing stock for growth and dividends

New Flyer Industries is a bus manufacturing company that builds municipal transit buses and larger intercity motor coaches for North American markets. AltaCorp Capital gives New Flyer an ‘outperform’ rating and recommends the stock to investors looking for capital gains based on strong business fundamentals and potential dividend increases.

Strong growth in terms of its return on capital metrics with percentages in the mid-teens, combined with a stronger order backlog and the potential for further dividend growth, AltaCorp Capital analysts Chris Murray and Samarth Modwal continue to recommend transportation equipment manufacturing stock New Flyer Industries (TSX—NFI) to investors looking for a growth stock with strong business fundamentals.

Messrs. Murray and Modwal maintain their ‘outperform’ recommendation for the company and they also raise their 12-month price target to $53 a share from $50 a share.

For the second quarter ended July 3, the company reported revenue, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted fully diluted earnings per share (EPS) of $586.9 million, $80.3 million and $0.58, respectively.

By comparison, AltaCorp had forecast $587.2 million in revenue, $72.5 million in adjusted EBITDA, and $0.55 in adjusted fully diluted EPS. Meanwhile, the consensus had pegged revenue, adjusted EBITDA and adjusted fully diluted EPS at $578.6 million, $71 million and $0.46, respectively.

Messrs. Murray and Modwal’s 2016 full-year EBITDA forecast rises to $293.1 million from $285.1 million. They also raise their 2017 and 2018 EBITDA estimates for New Flyer to $314.2 million and $331.3 million, respectively, from $314.9 million and $324.9 million.

The analysts’ projections for adjusted fully diluted EPS in 2016, 2017 and 2018 change to $2.09, $2.35 and $2.49, respectively, from $2.09, $2.41 and $2.48.

New Flyer had earlier received a notice requiring an immediate shutdown on ongoing work to build 184 commuter coaches for New Jersey Transit due to a lack of funding.

Messrs. Murray and Modwal say management has adjusted its production schedule by bringing other customers’ orders forward to allow more time for an acceptable funding resolution. In early September, management expressed confidence in a statement that the changes to production schedule would not impact its overall 2016 delivery goal of 3,450 equivalent units, or EUs.

(An equivalent unit translates to one heavy-duty transit bus or motor coach between 30 feet and 40 feet long. Extra-long articulated buses with a joint linking two passenger compartments are counted as two EUs.)

Management reiterated guidance to deliver 3,450 EUs during the 53 weeks of business in 2016, compared to 3,265 EUs during the 52 weeks of 2015. It also expects the aftermarket segment to grow about five per cent this year.

Messrs. Murray and Modwal note that management continues to guide for $10 million in synergies from the acquisition of fellow bus manufacturing company Motor Coach Industries. New Flyer management points out that the company has already achieved about $5 million of the targeted cost savings.

The analysts say: “While there remains a risk that the recent shutdown of production for New Jersey Transit may impact the delivery schedule for the remainder of 2016, we view it as a timing issue, likely to be resolved over the coming weeks.”

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846