Shares of Canada-based bus manufacturer NFI Group (TSX: NFI) fell 12% yesterday. The company just announced its third-quarter results and reported sales of $725.3 million — a rise of 19.8% year over year. Adjusted earnings per share (EPS) fell 58.6% to $0.24 in the September quarter.
Analysts estimated the firm to post sales of $740.19 million with EPS of $0.45 in the third quarter. We can see that NFI missed consensus estimates on both counts, driving the stock significantly lower on November 13, 2019.
NFI has now missed earnings estimates in four of the last five quarters, which has led to a 20% fall in the stock price over the last 12 months.
Record number of vehicles delivered
In the third quarter, NFI delivered 1,392 vehicles, which resulted in the firm’s highest-ever quarterly sales. NFI attributed record sales of its acquisition of Alexander Dennis Limited. NFI now has manufactured over 105,000 vehicles.
During the earnings call, company CEO and president Paul Soubry stated, “We have now stabilized our KMG parts and component manufacturing operations and commenced the reduction of excess vehicle work-in-progress inventory. The majority of vehicle deliveries impacted by the work-in-progress reduction plan are expected to be recovered in the fourth quarter of 2019 with some units now expected to be delivered in the first quarter of 2020.”
NFI expects the production and operational challenges experienced in the first half of 2019 to reduce in the fourth quarter, resulting in strong revenue and EBITDA performance. It expects to maintain leadership positions in core markets and continue to generate strong free cash flow with an eye on increasing shareholder value.
In the near term, NFI expects the transition to electric buses to impact profit margins due to competition and product mix variation in this segment. But as this market continues to expand, NFI is optimistic to benefit from economies of scale, which will result in cost efficiencies.
NFI is a global giant
While NFI generates the majority of sales from North America, the company is looking to expand aggressively in global markets. It has three manufacturing facilities and six parts & service facilities in Canada. In the U.S., it has six manufacturing facilities and 15 parts & service facilities.
In the last few years, NFI has expanded into the United Kingdom, Germany, China, Singapore, Malaysia, and New Zealand. NFI generates over 20% of sales from global markets, and a diversified business model helps to counter market-specific cyclicality. NFI expects the ADL acquisition to significantly impact sales from 2021, as the latter continues to gain traction in European markets.
What next for NFI and investors?
NFI stock is valued at $1.64 billion in terms of market cap, or 0.55 times forward sales. It has a debt of over a billion dollars. Analysts expect its debt-to-EBITDA ratio to be around 3.4 in 2019, significantly higher than its debt-to-EBITDA ratio of 2.1 in 2018.
The firm reported a free cash flow of $37.6 million, and its rising debt might be a cause of concern. It declared dividends of $26.5 million — a rise of 13.4% year over year, indicating a yield of over 6%.
NFI stock is trading at a forward price-to-earnings multiple of 10.5, which might be considered cheap, but it is cheap for a reason. Though NFI will continue to increase sales by double-digit percentages in 2019 and 2020, it continues to miss earnings estimates, driving the stock lower.
The stock is undervalued and has the chance to be a solid wealth creator for contrarian investors. However, NFI needs to find a way to improve profit margins heading into 2020.
