NFI Group’s share price is likely to recover, along with its earnings and cash flow per share, in the months ahead. NFI retains an investment quality rating of Average. It remains a Buy, according to editor Stephen Bernhut.
Hail to the bus manufacturer
NFI Group (TSX—NFI)
Let’s dive head first into the sticky aspects of NFI before we look at the uphill road ahead. There’s a decline in the company’s shares and it partly reflects a number of problems in the last year that continued into this year. First was COVID-19’s negative effect on public transportation that explained the individual’s preference for transit vehicles over public transportation organizations, resulting in the decline in ridership.
A second problem was supply-chain disruptions. This impacted production and parts sales. Clogged ports are likely to hurt deliveries and sales in Europe and Asia. Nonetheless, the company completed 78 per cent of its deliveries in North America. President and Chief Executive Officer, Paul Soubry also cites “inflationary pressures and timing delays” as influences.
NFI writes that it’s leading the electrification of mass mobility around the world. “With zero-emission buses and coaches, infrastructure, and technology, NFI meets today’s urban demands for scalable smart mobility solutions…It is 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, and 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 to take cost-reduction initiatives. Mr. Soubry explained that this, “is providing us with a lower fixed-cost base to improve margins and deliver enhanced returns on invested capital.”
NFI’s second strategy is to continue to expand into international markets. To this end, it acquired Alexander Dennis Ltd., (ADL), Britain’s largest bus maker. 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 available 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.
Plus, as big cities become more heavily populated, the need for public transportation increases. Too many private vehicles will create traffic gridlock. NFI’s numbers look dreadful at first glance. But they’re better than they seem.
In the first half of 2021, NFI generated cash flow of US$55.9 million. That’s up by nearly 91 per cent from cash flow in the first half of last year. Higher earnings per share usually lead to higher cash flow per share. Mr. Bernhut expects NFI’s balance sheet to keep improving. NFI is a Buy for long-term share price recovery.
*As of December 23, 2022, NFI has suspended dividends. There will be no distribution in January 2023.
This is an edited version of an article that was originally published for subscribers in the December 2022/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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The MoneyLetter •5/2/23 •