A whole lot of uncertainty’s come over NFI Group (TSX:NFI) in the fourth quarter of 2018, and that’s got investors concerned the manufacturer of buses and motor coaches is about to go on a prolonged losing streak.
Down 35% year to date through December 11, I’ve got three reasons why NFI stock, formerly known as New Flyer Industries, will make a comeback in 2019.
There are plenty of reasons why insiders sell company stock — daughter’s expensive wedding, son’s college education, a month-long trip to Asia; the list is a lengthy one — there’s only one reason they buy.
In mid-November, NFI director John Marinucci acquired 5,000 shares of the company’s stock at an average price of almost $37 a share, a couple of dollars above its current stock price. The $185,000 purchase by Marinucci brings his total investment to $4.6 million.
You might think that $185,000 isn’t a big deal, but you’d be wrong.
Marinucci served as CEO of NFI from 2002 to 2009 and has been a director of the company since June 2005. If there’s somebody on the board who understands the ebb and flow of NFI stock, Marinucci would be right up there with current CEO Paul Soubry.
Now, you might point out that under the company’s guidelines, Marinucci must own at least five times the annual fees earned in a given year, but that only works out to slightly less than $400,000.
The rest is on his dime.
When directors and executives buy, especially when the stock is down 35% on the year, it’s about as a strong indication the company’s shares are intrinsically undervalued.
Business is not about to end
The downturn in NFI stock is a result of a bunch of different factors coming together at one time.
In early November, Veritas Investment Research analyst Dan Fong said the company is facing increased competition, potentially lower U.S. federal funding, and fewer possible acquisitions to consolidate its control of the North American bus market further.
As a result of these negative factors, Wong has a “sell” rating and a 12-month target price of $38, just 10% above its current share price.
That is the glass is half empty view.
CIBC World Markets analyst Kevin Chiang has a more optimistic view.
“While the coach market has moved past its peak and there is some margin compression, we would argue NFI’s current share price is baking in a Great Recession-like downturn in the bus market over the next 12 to 18 months,” Chiang wrote in a note to clients. “We do not foresee the occurrence of such an event. Moreover, the transit bus market remains healthy.”
CEO Paul Soubry is one of the best chief executives in the country. He’s not going to get too excited in good times and too down in bad times.
All the company can do is plan for the future understanding that business is not always going to go its way. That said, I don’t believe its results in the third quarter were terrible.
Investors were merely taking profits after six years of double-digit annual gains.
A 4% yield
One of the financial metrics that I pay close attention to is free cash flow. It’s the reservoir that ensures shareholders get paid their annual dividends.
In the first nine months of 2018, NFI generated $153 million in free cash flow, 15% higher than a year earlier. That’s a dividend payout ratio of 44.2%, well below the level where investors should become concerned.
Furthermore, the company’s returned almost $80 million to shareholders in the form of dividends and share repurchases through the first nine months of fiscal 2018, 211% higher than a year earlier.
NFI currently yields 4.3% putting it in rare company amongst TSX stocks.
I consider it one of the five best stocks in the S&P/TSX Composite Index. At less than $35, it’s a bargain.