Canadian bus maker has an ‘immense growth trajectory’

Mark Bunting is a host at Bloomberg TV Canada, and the publisher of The Capital Ideas Digest, a weekly compilation of investment ideas based on a variety of research reports. The Globe and Mail provides marketing services and receives compensation from its parent company, Capital Ideas Research. Try it now to enter the new $25,000 winner-take-all stock picking contest.

Grande West Transportation Group Inc. (BUS-X) is a Canadian maker of heavy-duty, medium-sized buses.

The company could be on a rapid growth path, as it expands into the U.S. market. Analyst Aamad Shaath of Beacon Securities projects Grande West will grow its revenue this year by more than 500 per cent year over year to more than $73-million.

Grande West's key differentiator

Grande West distinguishes itself from other bus makers, such as New Flyer Industries Inc., by occupying a niche in the market it saw as untapped. The company compares what it calls its "right-sizing" business model to those of Southwest Airlines Co. and WestJet Airlines Ltd., when those companies filled a need for mid-sized planes.

Its management team believes it has "considerable first mover advantage as major bus manufacturers failed to recognize the trend" toward smaller transit buses.

Most transit buses are 40-feet long with an average of 58 seats. In the U.S., 82 per cent of those seats are usually empty, according to Mr. Shaath. Grande West's solution was to develop buses in the 27.5-to-35 foot range.

The company has a market value of about $180 million. The shares have already moved from less than 40 cents a share early last year to around $3.15, which is higher than Mr. Shaath's price target of $3. Grande West recently struck deals worth $7.5-million with four Canadian municipalities to deliver 20 of its flagship Vicinity buses.

Capital Ideas Digest interviewed the company's co-founder and chief executive officer Bill Trainer.

Mark Bunting (MB): What do these deals say about your company and the stage that you're at?

Bill Trainer (BT): A lot of these orders are repeat orders so what it's stating is that the industry has accepted our product extremely well, feel pleased with it, feel that we have the support level and the product that they're looking for, and it's just adding on to our great backlog and order book that we have.

MB: Give us a sense of how things have evolved for the company from when you first started working with BC Transit, and recognized an opportunity in the sector, to where you are now.

BT: You've got to identify the market space, then you've got to identify what price you've going to come into that market space, then you've got to provide something better particularly if you're a younger company. You've got to provide above what the industry was looking at a better service and better value ratio.

MB: Beacon thinks you're on the cusp of immense growth in the U.S., in part because you qualified for the Buy America program. What's the potential in the U.S.?

BT: To design this bus, we needed to design it for minus-40 [degrees Fahrenheit] to plus-40 degrees working conditions. We were best in class in the [U.S. Federal Transportation Administration] testing. It just validates the product that we have. So now we look at the U.S. market with the success that we've had in Canada, we're looking to have that same success now that we're validated with our testing, and now that we can meet the Buy America (requirements). We feel that we can go down to the U.S. now and capture that market the same way that we've done in Canada. It's really exciting because the numbers in the U.S. are so much greater.

MB: Would you agree that the big opportunity is that a lot of current bus fleets are older, and that utilization rates are quite low, and that's a real sweet spot for you guys?

BT: If you're a transit authority that's running 80, 90 per cent of your fleet all in 40-foot buses, and now you're given the opportunity for 40-to-50 per cent cost savings by rightsizing your fleet, now it really makes economic sense and gives these transit authorities something they can really save some money on."

MB: Could you throw some numbers at me in terms of expected growth rates, and the number of vehicles you expect to sell, and the size of the market?

BT: We got about 270 unit sales out of the Canadian market space in the last 12 months. We're now expecting to go into the U.S. and can get 10 times the volume that we got on the Canadian market. But we see that market space being upwards of a thousand buses per year in the initial launch, so it's quite exciting.

MB: What kind of sales force do you have? What do you have in terms of boots on the ground?

BT: In the U.S., we have a strong distribution arrangement with Alliance Bus Group, which is one of the largest mid-sized bus distributors in the U.S. They have seven mega stores throughout the U.S. so that's how were launching into the U.S.

MB: When can we expect some U.S. orders?

BT: We couldn't be in a better position that the company's ever been in right now, so we're quite excited, If you just watch, we really think we'll start to take in some pretty major U.S. orders relatively quick.

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Analyst Report

An excerpt from a research report on Grande West from Mr. Shaath at Beacon Securities, which recently was part of a syndicate of underwriters that helped the company raise nearly $14-million.

"We believe Grande West is on the cusp of establishing a foothold in an industry with high barriers to entry, and sits on the cusp of an immense growth trajectory," he said. "Consequently, we believe the company has a "once-in-a-lifetime" opportunity to become an established transit bus provider, which makes it a great investment opportunity."

Mr. Shaath believes Grande West is just starting its growth trajectory towards delivering more than 400 buses annually and expects $175 million in annual revenue by 2021. He expects the company to turn profitable this year with EBITDA of about $8 million.