NFI Group Inc.’s share price sank on Monday, in the first day of trading after the company warned on Friday afternoon that supply-chain disruptions will weigh on its financial performance for the remainder of the year – underscoring an issue that is now percolating through the broader stock market.
The shares closed in Toronto at $22.81, down $7.05 or 23.6 per cent, on a particularly turbulent day for investors. Major stock market indexes suffered their worst one-day declines in months, with the S&P 500 falling 1.7 per cent.
NFI, formerly New Flyer Industries Inc., is a bus manufacturer that has appealed to environmentally conscious investors with its commitment to electric vehicles and mass transportation.
After markets closed on Friday, the company warned that the availability of critical parts had deteriorated rapidly since its last earnings announcement on Aug. 4, owing to global supply-chain challenges. As a result, NFI is reducing production and idling some facilities.
“These temporary actions will assist in controlling costs and preserving cash flows until supply availability and delivery reliability improve,” Paul Soubry, chief executive officer at NFI, said in a news release.
Across the global corporate landscape, supply-chain disruptions have snarled the delivery of everything from food to semi-conductors, and have emerged as a key hurdle to earnings visibility and the global economic recovery even as lockdowns end.
In the case of NFI, the disruptions erased about $440-million from the company’s stock market value in a single trading session, as investors and analysts assess the damage to financial performance.
“Although we remain positive on NFI’s longer-term prospects supported by increased bidding activity and strong government support for transit funding, we believe the supply chain issues will linger well into 2022,” Cameron Doerksen, an analyst at National Bank of Canada, said in a Monday research note.
NFI has slashed its revenue guidance for 2021 by about US$500-million, to a range between US$2.3-billion and US$2.5-billion. It also lowered its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by about 22 per cent.
Mark Neville, an analyst at Bank of Nova Scotia, noted that the news of supply-chain challenges at NFI shouldn’t come as a big surprise given that the pandemic has hurt a number of industries and manufacturers globally this year.
However, the analyst added, the magnitude of the company’s revision is remarkable: The new guidance implies that EBITDA in the second half of this year will be about 40 per cent below management’s prior expectations.
What’s more, the setback will likely add to the company’s financial stress, potentially putting NFI in breach of its debt covenants in the first half of 2022.
“That being said, we expect the company to be proactive in its discussions with lenders, who have shown a willingness to work with NFI through the pandemic – i.e., the company effectively received covenant waivers for 2021,” Mr. Neville said in a note.
NFI has emerged as a particularly severe example of how supply-chain disruptions can affect corporate activity, and a stock price. But the company is a small part of a larger trend that has economists, analysts and market strategists assessing the broader impact.
Last week, Fitch Ratings cited supply constraints as a key factor in its decision to lower its forecast for global economic growth in 2021. Fitch now expects the economy to expand by 6 per cent this year, down from a forecast of 6.3-per-cent annualized growth as recently as June.
Lori Calvasina, head of U.S. equity strategy at RBC Dominion Securities, believes that supply constraints are contributing to a deterioration in investor sentiment. In a note, she said that many companies since Labour Day have highlighted “the unprecedented nature of their problems on this front, and many indicating these woes may persist into 2022.”
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