We know that it is difficult to beat the broader markets. ETFs and indexes have a basket of stocks that help diversify investor risk significantly. Growth stocks drive indexes higher in a bull run, while dividend stocks help limit the damage in a downturn.
Here, we look at one such dividend stock that is trading at a cheap valuation and should outperform the markets in the upcoming years. The company is NFI Group (TSX: NFI).
NFI is a Canada-based bus and coach manufacturer with sales across the United States and Canada. It has over 32 fabrication, manufacturing, and distribution services centres.
Earnings decline led to NFI’s pullback
Shares of NFI Group have fallen over 43% in the last 12 months. While NFI is estimated to grow sales by 17.1% year over year to $2.95 billion in 2019, its earnings are estimated to fall by 25.9% this year.
This earnings decline coupled with earnings miss in three of the last four quarters has driven NFI stock lower. NFI missed analyst earnings estimates by 17.6% in the June quarter. It also posted earnings 36.6% below estimates in the March quarter of 2019.
While NFI’s earnings per share (EPS) was 6.2% higher than estimates in the fourth quarter of 2018, it posted EPS 3.4% lower than estimates in the quarter ended in September 2018.
A stock’s dividend yield rises with a fall in share price and NFI now has a yield of 5.9%. Further, NFI will return to earnings growth in 2020. Analysts expect company sales to rise by 11.2% to $3.28 billion and EPS to grow by 29.4% in 2020.
They also expect earnings to grow at an annual rate of 31.4% over the next five years. This means NFI’s EPS might increase at an annual rate of over 50% between 2020 and 2023.
When you compare NFI’s earnings growth and dividend yield with the stock’s forward price-to-earnings multiple of 11.1, you can see that it is grossly undervalued. NFI has significant upside potential.
Why should investors turn bullish on NFI?
Despite the recent pullback, NFI has built significant investor wealth over the years. NFI stock has more than doubled in the last five years and has returned an impressive 350% since its IPO in August 2011.
While NFI’s discounted valuation should drive the stock price higher, investors should also be excited about the company’s strong presence in the bus manufacturing market in North America.
NFI’s New Flyer brand is North America’s largest heavy-duty public transit bus manufacturer and the leader in zero-emission bus transit. The MCI brand is a North American leader in motor coaches for public and private operators. NFI acquired Alexander Dennis earlier this year, which is the U.K.’s largest bus and motor coach manufacturer as well as a market leader in New Zealand and Hong Kong.
Manufacturing accounts for 85% of NFI sales, while aftermarket services account for 15% of sales. The company’s NFI Parts brand is North America’s largest bus and motorcoach parts distributor.
The verdict
NFI is a market leader in the U.S., Canada, the U.K., Hong Kong, and New Zealand markets. It is gaining traction in Singapore, Malaysia, and Mexico. NFI has several things going right for it at the moment, including robust sales and bottom-line growth.
Analysts are not too optimistic about NFI at the current price. They have a 12-month average target price of $29.29 for the stock, indicating upside potential of just 3.4%. NFI, however, has the potential to be a solid wealth creator and generate multi-fold returns going forward.
