NFI Group (TSE: NFI) is a well-known name in the bus and coach manufacturing industry in Canada. The company’s primary business segments include transit buses, motor coaches, low floor cut-away, medium-duty vehicles, and aftermarket parts.
NFI Group appears extremely cheap with a price to earnings ratio of 12.8 times earnings and a market capitalization of $1.75 billion.
The bus and coach manufacturing industry have high barriers to entry due to capital intensiveness, comprehensive supply chain networks, federal manufacturing licenses, and the need for an established industry track record to sell locomotives to governments and provinces.
There are five major companies operating in North America: New Flyer, Gillig LLC, NOVA Bus Inc., BYD, and Proterra. NFI Group has a 46% market share in Canada and United States. It is important to note that the industry has seen strong demand for electric buses to reduce emissions.
NFI Group’s revenues has been increasing significantly over the years through mergers. Despite continuing costs required to take advantage of market opportunities, NFI Group has improved profitability. However, the company faces strong competition from Volvo and Gillig.
The company has over 400 heavy-duty transit customers, mainly composed of government and provincial affiliates. NFI Group uses modest amounts of leverage and has an adjusted return on invested capital of 8.7%.
The company is considered a high-quality company due to the presence of a sustainable moat and economies of scale as a market leader, pricing power, and a supply advantage due to the presence of contractual obligations with government agencies.
A recent acquisition of the company demonstrated capital allocation discipline of the current management. NFI Group purchased Alexander Dennis Ltd (ADL) and made several management changes amid an increase in competition for new contracts.
NFI Group made this acquisition on May 28, 2019 for a total transaction value of $426 million on a cash-free, liability-free basis. Alexander Dennis is one of the world’s largest independent bus and coach manufacturers and a global producer of double-decker buses.
ADL generated free cash flow to the firm of $23 million year to date before the closing of the transaction. From 2010 to 2017, ADL achieved a compound annual revenue growth rate of 9.9%. NFI Group also entered into an arrangement with ADL’s CEO and CFO, who were tasked with leading NFI Group’s international growth aspirations.
This acquisition is expected to provide diversification benefits and help acquisition prospects worldwide. NFI Group incurred $420 million in debt and issued modest amounts of equity to fund the transaction.
With an excellent track record of fostering an entrepreneurial mindset and investing heavily in environmentally friendly buses, NFI Group looks set to take advantage of mispricing in the bus and coach manufacturing industry as customers demand green solutions in Europe and Asia.
Although NFI Group has faced stiff performance challenges, the company has always emerged stronger than ever and improved service to customers. Issues have included delays in rolling out new products, missed production days and faulty inspections, resulting in a decline in profitability.
With strong market share in the industry, and a proven management team and track record, NFI Group could provide outsized returns in the future relative to the S&P 500 Composite Index.
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Fool contributor Nikhil Kumar has no position in any of the stocks mentioned. The Motley Fool recommends NFI Group. NFI Group is a recommendation of Stock Advisor Canada.