Blue Bird Corporation (NASDAQ:BLBD), one of the leading school bus manufacturers in the United States, caught my attention almost a year ago as the company, in my opinion, was well-positioned back then to benefit from the growing demand for EV school buses. My investment thesis for the company was centered around a few key observations.
- I thought Blue Bird’s turnaround strategy would expand profit margins while helping the company make the most of the growing demand for EV buses.
- I believed The EPA Clean School Bus Rebate Program would have a positive impact on both the short and long-term demand for Blue Bird’s EVs.
- I thought Blue Bird would benefit from a favorable product mix in the future with the company planning to increase the prices of new buses by $2,500.
- Blue Bird was positioned to benefit from favorable industry trends with regulators promoting the use of alternative energy school buses.
In the past 12 months, most of these factors have played exactly as I thought they would. Blue Bird’s financial performance has improved meaningfully during this period. From a loss of $11 million in Q1 2023, Blue Bird has come a long way to report a profit of $26 million in Q2 2024.
Exhibit 1: Blue Bird quarterly net income
FinChat
Mr. Market has not been oblivion to Blue Bird’s turnaround story. Since my first article, published in July 2023, BLBD stock is up 113%. I revisited my thesis last December to find Blue Bird executing well, and in today’s update, I will assess the current valuation of the company and the broad market opportunity to determine whether BLBD is still an attractive bet.
Favorable Policies Will Be A Growth Catalyst
When I developed an interest in Blue Bird a year ago, I had to dive deep into the economics of the school bus market to understand what is keeping school districts from transitioning to electric buses despite the benefits they offer. EVs offer several clear advantages over diesel buses, such as lower maintenance costs and savings on fuel.
According to Blue Bird, its EVs can reduce operating costs from around 50 cents per mile to 14 cents per mile as electricity is often cheaper than fossil fuel. A study conducted by the Federal Transit Administration found in 2019 that transitioning from diesel buses to electric buses will save approximately 44% in maintenance costs per mile.
In addition to these benefits, increased adoption of electric buses will help the government’s emission goals. According to the Environmental Protection Agency, replacing a diesel school bus with an electric bus will save 54,000 pounds of CO2 annually.
None of these perceived wins, however, was sufficient to lure school districts to replace diesel buses because of the substantial initial capital outlay required to purchase electric buses. As of last April, the average contracted price for an EV bus was $352,000 while diesel buses were selling for an average of less than $100,000. This massive disparity between EV and diesel buses has been the primary reason behind the slow adoption of EV buses.
Exhibit 2: Average purchase price of electric school buses for recipients in the Clean School Bus Program
Resources.org
This is where things get interesting.
In the last couple of years, the Federal government and several state governments have launched programs to accelerate the adoption of electric buses by offering financial support to school districts. These supportive regulatory decisions pave the way for school districts to keep their upfront costs limited while benefiting from the low operating costs of electric buses.
Some of the notable policy developments include:
- The EPA Clean School Bus Program which provides $5 billion in funding to purchase electric buses.
- DOE loans and grants.
- California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project which offers funding between $140,250 and $375,000 per bus.
- New York Truck Voucher Incentive Program which offers up to $120,000 per electric school bus.
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Massachusetts Electric Vehicle Incentive Program which offers up to $75,000 per electric bus.
With state governments showing an increased desire to support the adoption of electric school buses, I expect the top EV bus makers to see a continued expansion in the backlog. This market is concentrated among a few players such as Blue Bird, Thomas Built Buses, and IC Bus, which suggests Blue Bird is well-positioned to benefit from macro tailwinds.
The Addressable Market Opportunity Is Massive
The adoption of electric buses has accelerated in recent years. As of December 2023, there were 3,769 electric school buses on U.S. roads, up from just 767 in June 2022. The total number of committed electric school buses stood at 12,164 as of Q2 2024 compared to just 3,291 two years ago. According to the World Resources Institute, California leads the way with approximately 2,300 committed electric buses.
Exhibit 3: Total number of committed electric school buses
World Resources Institute
According to the New York School Bus Contractors Association, there are approximately 480,000 school buses in the U.S. today, transporting 26 million students annually. Despite the recent uptick in electric bus commitments, more than 90% of these buses run on diesel. This low penetration of electric buses will pave the way for stellar EV growth in the next decade.
Blue Bird, since 2018, has progressed toward offering alternative energy buses and its exposure to diesel buses has declined sharply since then. This gives me confidence that Blue Bird’s business strategy is perfectly aligned with today’s market requirements.
Exhibit 4: Blue Bird’s unit sales by year
Investor presentation
As discussed in the next segment, Blue Bird continues to focus on growing its EV division.
Investing To Grow
One of the key risks of investing in turnaround stories is that these companies may repeat their original mistakes in the future. Blue Bird has successfully come out of a tough phase to see light – and profits – at the end of the tunnel. Even more encouragingly, the company is focused on keeping its foot on the pedal to ensure it captures new opportunities to grow.
During the recent earnings call in May, the management highlighted their plans to double CapEx to increase manufacturing capacity. The company is targeting to manufacture 50 new buses per day to meet the growing demand for electric school buses. In addition to expanding manufacturing capacity, Blue Bird is also focused on improving the safety features of these buses, investing in supply chain capabilities, and upgrading production facilities.
The Valuation Is Reasonable
Blue Bird is currently valued at a forward P/E of 17.5 and a P/S multiple of just over 1. With electric bus sales expected to account for the bulk of revenue in the long term, valuation multiples are likely to mirror that of leading EV makers in the world. For context, Tesla is valued at a forward P/E of 91 today. It will take time – probably a couple of years – for this transition to take place. BLBD stock’s strong performance this year amid the disappointing performance of U.S. EV market leader Tesla, Inc. (TSLA) is an indication that the market is beginning to see value in Blue Bird’s profitable EV expansion.
Blue Bird President Britton Smith, in an interview with Newsweek last week, made some bold remarks including the suggestion that other EV makers should take a leaf out of its book.
Blue Bird shows that as an EV company, you can still make money, and Blue Bird is doing that with every bus that we sell.
As bold as that statement is, it is true. Blue Bird’s electric buses have boosted the company’s profitability, which is a good enough reason to suggest that earnings multiples will expand in the future.
I am not suggesting Blue Bird should trade at similar earnings multiples as Tesla, but today, the company seems cheaply valued given its growing exposure to EVs.
Takeaway
Blue Bird has delivered the promised goods in the last 12 months. In the next 12 months, the company will continue to benefit from favorable macroeconomic developments. Earnings revisions are likely to maintain an upward trajectory in the coming months with the company boosting its guidance for the current Fiscal year. This should create strong momentum in the market, lifting BLBD stock higher. I am planning to remain invested in BLBD for the long run and I believe investors are not too late to jump on board yet.
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