There were relatively few changes to the S&P/TSX composite index in its quarterly update last month, with two stocks added and four dropped. One notable addition to the industrial sector in the S&P/TSX composite, as well as to the S&P/TSX composite dividend index is profiled below.
The company
Winnipeg-based New Flyer Industries Inc. is North America's largest transit bus and motor coach manufacturer. The stock was a top performer in 2015, fuelled largely by its acquisition of Motor Coach Industries (MCI), as well as solid reported quarterly financial results.
The company has attractive attributes that may help the stock deliver solid gains in 2016 such as:
– Market leadership. Management estimates that in 2014, the company had a market share of approximately 48 per cent of the North American transit bus manufacturing industry. In addition, recently acquired MCI is itself a dominant industry player, at nearly double the size of its nearest North American competitor.
– Attractive acquisition. Management anticipates it will realize cost synergies of approximately $10-million annually from the MCI acquisition. However, this figure may prove to be conservative. The acquisition was accretive as New Flyer paid approximately six times forecast 2015 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), which is below New Flyer's own multiple. The acquisition will diversify New Flyer's revenue.
– Growth in revenue, earnings and free cash flow. The company reports financial results in U.S. dollars. In the third-quarter, approximately 92 per cent of the company's revenue was from the United States, with the balance from Canada. The consensus revenue estimate is $1.5-billion (U.S.) in 2015, rising 39 per cent to $2.1-billion in 2016. The consensus EBITDA estimate is $137-million in 2015, climbing to $213-million in 2016. The Street is forecasting earnings per share of $1.05 in 2015 increasing to $1.59 in 2016. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)
– New contract awards. Among its recent wins was a contract for up to 159 transit buses over the next five year from Greater Lafayette Public Transportation Corp., and in October, the company announced it was awarded a contract for up to 725 transit buses over the next five years from the Massachusetts Bay Transportation Authority. As of the end of the third quarter, the company's backlog stood at 7,290 equivalent units, representing approximately $3.59-billion of revenue. This is up from 6,745 equivalent units, representing $3.39-billion of revenue as of Dec. 28, 2014. (One 30-foot, 35-foot or 40-foot transit bus represents one equivalent unit. One articulated bus represents two equivalent units.)
Industry conditions may lend support to the company's growth and profitability as economic conditions strengthen and transit spending budgets are expanded.
Dividend policy
In December, the company announced a 12.9-per-cent hike to its annual dividend rate, the second dividend increase announced in 2015. The company will pay shareholders a quarterly dividend of 17.5 cents (Canadian) a share, or 70 cents per annum up from 62 cents, equating to an annualized yield of approximately 2.5 per cent.
The dividend appears sustainable with room for future dividend increases as the company reduces its debt levels, which increased because of the MCI acquisition. Year-to-date, as of the end of the third quarter, the company's free cash flow payout ratio was 41 per cent.
Valuation
On both a forward enterprise value to EBITDA multiple and price-to-earnings (P/E) multiple basis, the stock appear reasonably valued. For instance, the stock is trading at a P/E multiple of more than 12 times, roughly in line with its historical three-year average. However, there is potential upside to the consensus EBITDA and earnings estimates, which would give the stock price room to expand.
Analysts' recommendations
According to Bloomberg, there are four buy recommendations and one market perform or hold recommendation with an average one-year price target of $29.10, suggesting limited upside from current levels. Price targets vary from $26 to $35.
Chart watch
The shares experienced a parabolic move in 2015, with the share price more than doubling. In previous years, 2014 and 2013, the stock price realized respectable gains of 27 per cent and 23 per cent, respectively.
The stock price may need to consolidate around $26 to $28, digesting its recent gains. There is technical support near $27, and failing that around $26.
Bottom line
While we may not see repeat stellar stock performance in 2016, shareholders may realize a respectable double-digit total return in 2016 and may wish to accumulate shares on weakness.
As always, I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
The author does not personally own shares in the security mentioned in this story.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.