Why the Sell-off at New Flyer?
Tom Konrad CFA
Heavy duty transit bus manufacturer New Flyer
released its fourth quarter earnings and annual
report on March 21, quickly followed by analyst downgrades from CIBC
and Canacord Genuity.
Too far, too fast
Over the next few days, the stock fell from over $8 to below $7,
although it is still well above the level where followers of my Ten
Clean Energy Stocks for 2012 would have purchased ($5.65)
even after dividend payments worth $0.22. After a rise like
New Flyer has had over the last three months, some investors took
the opportunity to get out now that it looks like any improvement
in the heavy duty transit bus market will take longer than they
Transit Bus Market
The US market for transit buses continues to be weak. While North American bus ridership is at its second highest level since 1957 (the highest being during the 2008 gas price peak), The transit bus market remains dismal, mostly due to tight municipal budgets in the US and continued uncertainty surrounding the Transportation bill currently being held up in the US House of Representatives.
While New Flyer has been able to
maintain production rates because of their strong backlog, several
competitors have idle capacity, and have been bidding very
aggressively to keep that capacity active. Rather than bidding
aggressively in response, New Flyer is instead reducing its
in order to maintain production rates. Over the coming year,
management expects to maintain production without aggressive
bidding by continuing to reduce their backlog, even to the point
of producing some buses ahead of schedule
While in the long term, the aging
US fleet and increased bus ridership should lead to a resurgence
demand for new, the current competitive climate is likely to lead
near term consolidation among the five major players (Gillig
Corporation, North American Bus Industries (“NABI”), Orion and
Nova Bus are the other four.) New Flyer has the largest market
share, at 35% of new deliveries in 2011, up from 34% in 2010, most
likely due to the idled capacity at other manufacturers. One
other bright spot is the shift towards clean propulsion buses
(mostly hybrid and compressed natural gas), which made up 68% of
New Flyer's sales in 2011. These buses have higher margins
than conventional diesel buses.
Transport Bill Held Up
The current weak state of the bus market is compounded by political uncertainty.
The US Transportation bill needs to be renewed by March 31st to
avoid a halt of road work and other federal transportation
programs, such as subsidies to municipal transit authorities
towards bus purchases. As of March 26th, Congress looked
more likely to pass a short-term stop-gap measure, although even
is in doubt, with each party maneuvering to blame the other for
While President Obama and Democrats are touting the job creation
benefits of investing in transportation infrastructure (which
include jobs in public transit and bus manufacturing,) Republicans
in the House are objecting that the Senate version of the bill
does not "address
the issue of rising gas prices." House leader John
Boehner (R) wants to include provisions opening up more federal
lands for oil drilling. Bohener's position is disingenuous
(increasing drilling will not significantly affect gas prices,
prices are now set mostly on the demand side, not the supply
side.) Instead, if Congress wants to address the pain
Americans feel from rising gas prices, the most effective policy
measures they can take are increasing support for public transit
and other alternative transportation which allow Americans to get
around without using as much gas as they do in cars.
Endangering current support by putting the Transportation bill in
question is a step in the wrong direction.
If no bill or stop-gap measure is passed, we can expect a further
fall in New Flyer's stock price, but Congress reaches a useful
agreement this week, we can expect a quick rebound.
I expect at least a stop-gap transportation bill to pass this
week, which should help stabilize New Flyer stock. In the
longer term, we should expect to see consolidation in the transit
bus industry, as well as an industry rebound, as higher ridership
and an aging bus fleet compels transportation authorities to find
the funding to order replacement buses. In terms of
consolidation, New Flyer is more likely to be an acquirer than to
be acquired. The recent annual report if full of references
to how the recent share restructuring "provides the flexibility
needed to pursue strategic opportunities for continued long-term
growth and diversification."
Given that other bus manufacturers are currently in deeper
distress than New Flyer, I expect that if they make an
acquisition, it will be at an attractive price.
DISCLOSURE: Long NFYEF.
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