Pat McKeough recently replied to a Member of his Inner Circle who enquired about a Canadian stock with a distinct niche. It makes more transit buses than anyone else in North America.
New Flyer Industries recently made a major acquisition, while its revenues have grown steadily and its shares are up 40% in the past year. Pat notes that the company’s long-term outlook is sound. But with its high volume of cross-border business, it would feel the effects if NAFTA talks lead to higher tariffs.
Q: Pat: What are your thoughts on New Flyer Industries?
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A:NEW FLYER INDUSTRIES (symbol NFI on Toronto; www.newflyer.com) is the leading transit bus maker in the U.S. and Canada. It also provides parts and service.
From 2012 to 2016, the company’s revenue jumped 163.5%, rising from $872.9 million to $2.3 billion. Earnings climbed from just $9.8 million, or $0.22 a share, in 2012, to $124.9 million, or $2.10, in 2016. Those gains came from the successful introduction of new models and a growth in the number of contracts.
In the three months ended October 1, 2017, New Flyer’s revenue rose 5.9%, to $541.7 million from $511.5 million a year earlier (all figures in U.S. dollars). The gain was mainly due to a 12.9% increase in bus deliveries. That offset a 3.9% drop in selling prices and a 5.1% decline in parts and service revenue. Earnings per share jumped 27.9%, to $0.55 from $0.43.
Growth stocks: Company’s order backlog continues to rise
New Flyer recently paid $95 million for ARBOC, a North American leader in low-floor, body-on-chassis (or “cutaway”) bus technology. These buses range between 21 and 35 feet in length, and operate in transit, paratransit and shuttle applications. ARBOC buses exceed U.S. federal fuel economy standards and Buy America requirements; they also undergo safety testing beyond industry norms.
Bus manufacturing and servicing remain highly competitive businesses. However, New Flyer’s long-term outlook is sound. Transit spending is steadily rebounding as vehicle fleets age and government finances improve.
The company, which has over 60% of its supply chain in the United States, is bound to feel the effects if the re-negotiation of the North American Free Trade Agreement (NAFTA) results in higher cross-border tariffs.
Meantime, the company’s order backlog continues to rise: it stood at $5.4 billion (or 10,537 buses) on October 1, 2017. That’s up 3.1% from $5.23 billion (or 10,187 buses) at the start of 2017.
The stock is up 40% over the past year and now trades at 22.7 times the company’s forecast 2018 earnings of $2.57 U.S. a share. The shares yield 2.4%, and the dividend appears safe.
Inner Circle recommendation: New Flyer Industries is okay to hold.
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