Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
NFI Group Inc., formerly known as New Flyer Industries, was a recommendation of my Internet Wealth Builder newsletter for more than six years, from March, 2013, to July, 2019.
It was originally recommended at $10.30. When we sold, the shares were trading at $30.94, for a gain of 200 per cent plus dividends.
NFI is a Winnipeg-based manufacturer of mass transportation products under various brand names. Its vehicles incorporate a wide range of drive systems including clean diesel, natural gas, diesel-electric hybrid and zero-emission electric. NFI says it now supports more than 105,000 buses and coaches in service worldwide.
We liked NFI in part because of its emphasis on energy-efficient vehicles. But by mid-2019, the company was experiencing a dramatic drop in orders (down 52 per cent year-over-year) and the backlog was declining.
The company also reported problems with its new US$28-million KMG Fabrication plant in Kentucky. The operation was slow to reach operational goals and the company replaced top management. But NFI acknowledged that the Kentucky plant would be a drain on earnings for several quarters.
The stock was in a steady decline and we made the decision to advise readers to sell before it dropped lower. It turned out to be a good call; NFI shares fell all the way to $9.12 in the stock market dive last March.
But now it’s time to take a fresh look at the company. Business is improving and the shares are back to the range where they were when we issued the sell signal.
Earlier this month, the company confirmed 2020 financial guidance and issued 2021 guidance, as well as setting targets for 2025. If management can meet its goals, the result should be a significant boost in the share price.
For the 2020 fiscal year, NFI reconfirmed adjusted EBITDA of between US$145-million and US$155-million. This year, the company projects adjusted EBITDA between US$220-million and US$240-million. This would represent a potential improvement of more than 50 per cent from 2020 expectations. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)
Management anticipates revenue growth and enhanced profitability driven by market recovery, increased sales of zero-emission buses (ZEBs), geographic sales expansion, and continued realization of fixed and variable cost reductions.
The company also announced longer-term targets for 2025, including adjusted EBITDA of between US$400-million and US$450-million and a return on invested capital target above 12 per cent.
Orders are picking up, despite the impact of the pandemic on usership of public transit. On Jan. 12, NFI announced that the Connecticut Department of Transportation has awarded the company a contract for 12 Xcelsior battery-electric, 40-foot heavy-duty transit buses, with options to purchase up to 63 more ZEBs throughout the remaining term of the two-year agreement.
NFI’s plan is to lead the transition to ZEBs, including a target that 35 per cent to 40 per cent of the company’s manufacturing revenue will come from the sale of ZEBs by 2025. It’s an ambitious program, but with a new administration in Washington that rates improving public transit and climate control among its top priorities, it’s feasible.
We are restoring NFI Group to our buy list, but readers should be aware that the company is still in a money-losing position. Net loss for the first three-quarters of fiscal 2020 was US$132.1-million (US$2.11 a share). That was an improvement over the same period in 2019 (loss of US$3.18 a share), but the bottom line is still deep in the red.
The company cut its dividend in half at the start of 2020, to 21.25 cents (Canadian) a quarter (85 cents annually). The shares yield 2.7 per cent at the current price.
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