Why Did New Flyer Industries Inc. Hit All-Time Highs Last Week?

New Flyer Industries Inc. (TSX:NFI) is a fantastic company. Are shares getting a bit overheated though?

| More on:

New Flyer Industries Inc. (TSX:NFI) is North America’s top-selling transit-bus manufacturer and parts supplier. The company controls 48% of North American new sales and 33% of the aftermarket space. Shares have been on a tear lately, up over 100% in just the past 12 months. Last week shares hit a 52-week (and all-time) high of roughly $30.50.

Long-term shareholders are clearly more than pleased. What’s contributing to New Flyer’s success?

Set up for success

With a 50% market share, New Flyer is easily North America’s largest transit bus and motor coach manufacturer. After Daimler AG exited the market in 2011 and New Flyer purchased North American Bus Industries in 2013, the entire industry was reduced to just three major players. As the dominant player in the industry (with the largest sales force and greatest economies of scale), the company was poised for success.

Fast forward to today, where 24 out of the top 25 transit authorities on the continent run New Flyer buses, and the company’s committed backlog has reached $1.1 billion. There’s still plenty of growth available too, especially within the high-margin aftermarket parts segment.

With 70,000 vehicles in service, the company has the largest installed base of buses and coaches in North America. To service repair needs, New Flyer has an integrated service segment that carries the market’s widest portfolio of parts as well as the industry’s largest distribution network along with the shortest delivery times. For every vehicle New Flyer sells, it’s usually guaranteeing itself years of reliable, highly profitable service revenue.

Management is focused on shareholder returns

New Flyer hasn’t just grown for the sake of growth. Return on invested capital reached 11.7% last quarter and has consistently been around 8-9% in recent years. While that’s not the highest the market has to offer, it’s fairly respectable for a capital-intensive business. It’s also provides the company with plenty of excess capital to put towards growth initiatives, acquisitions, and dividends.

In the last 12 months, the company has generated $82 million in free cash flow. Even with a 2.7% yield, only 40% of free cash flow is directed towards dividends. As the company matures and builds out its installed base, expect the payout to start increasing.

There is plenty of room to take on more leverage to boost shareholder returns as well. Since 2010, management has reduced debt from over $400 million to just $250 million, all the while growing the business tremendously. With debt levels down to just 54% of total equity, New Flyer could easily raise more financing to move into adjacent markets or acquire its remaining competitors.

Are things too expensive?

At 25 times earnings, most investors would surmise that the valuation has caught up with the attractiveness of the business. Looking at how fast the company is growing, however, it could still be a bargain. Revenues are expected to grow 50% this year, aided by its blockbuster $445 million acquisition of Motor Coach Industries International. If earnings estimates are correct, shares could be trading at just 11 times forward earnings. Not bad for an oligopoly business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »