In a year like 2020 where Canadian stocks consisting of renewable energy and EV vehicle companies were all the rage, it may have been strange to see a company like NFI Group (TSE:NFI), which is a manufacturer of zero-emission and electric hybrid busses take a hit.
However, there are a few things that impacted the company in a significant way over the last year and a half, and also some strong signs from the company's most recent earnings quarter. Both of which we're going to go over in this article.
What exactly does NFI Group (TSE:NFI) do?
NFI Group, or as the company used to be called, New Flyer Industries, is a manufacturer of transit busses and motor coaches.
Manufacturing represents a little more than half of the company's revenue, while its aftermarket solutions include spare parts and servicing related to its transit buses and motor coaches.
Although the company is Canadian, most of the fabrication, manufacturing, distribution, and servicing of its products takes place in the United States, and as a result it derives most of its revenue from the US.
NFI's aim for emission-free vehicles should be a positive catalyst
As of right now, NFI supports over 35,000 heavy-duty transit buses in service. Of those 35,000 over 8,600 are electric or battery, while 1,900 are emission free.
As more and more evidence surfaces from the impacts of climate change, we feel political and jurisdictional movements towards greener forms of energy will be a tailwind for NFI. After all, the company's primary goal is towards becoming a zero-emission transit company.
If this is the case, why didn't NFI Group rise with other renewable companies?
If we look to most renewable energy companies, we'll see a common trend. A parabolic rise in mid-to-late 2021 followed by a significant dip once the euphoria subsided.
However, NFI Group didn't seem to benefit much from this at all. In fact, if you look to the chart below, the company is essentially just reaching its pre-COVID price point, where another electric bus company like GreenPower Motor (GPV.V) is up nearly 870%.
So what gives exactly? Why didn't NFI catch some of the EV/renewable wave in 2020?
There were a few operational issues to speak of. Lets get to the first one.
The company cut the dividend and idled factories
The COVID pandemic hit NFI Group hard. In fact, in late March, less than a month before the virus rocked the North American stock markets, NFI slashed its dividend, idled its factories, and pulled its 2020 guidance.
Any one of these things on their own is enough to rock a company's share price. All 3 happening at once? It didn't look good for NFI.
What was relatively a fast paced profitable growth company was now one expected to struggle significantly in 2020. It did just that, posting a loss per share of $3.37 and revenues came in significantly lower than 2019 levels.
Meanwhile, a company like Greenpower, simply because of the size and relatively young nature of the company, was able to continue impressing investors, churning out revenue growth and boosting optimism.
But, most of the hardships for NFI Group are relatively behind them now, highlighted by some strong results in its most recent quarterly report.
NFI Group is on the verge of turning things around
NFI posted quarterly results not too long ago that resulted in revenue of $583M USD and adjusted earnings per share of $0.12 USD.
This is a beat on revenue estimates, and actually a significant beat on earnings expectations. In fact, most analysts had this company posting a loss, when in fact it posted its third quarter of profitability after a challenging 3 quarters in the midst of the pandemic.
The company also came out of the quarter with a backlog of just over $4B and active bids are up nearly 50% since the previous quarter. This is a strong sign that municipalities and governments are again spending on transit.
In terms of zero emission and fuel cell electric buses, they now make up over 16% of the company's total backlog and made up 8% of its most recent quarter. The company stated it is well on track to hitting 20-25% of its total deliveries coming from its ZEB (Zero-Emission, Battery and Fuel-Cell) products.
It also re-affirmed its EBITDA guidance, stating that it should be able to close the year out with a potential 50% improvement over Fiscal 2020.
It seems clear that a turnaround is in the works. But, when we look to forward estimates, is the company worth the cost you're paying today?
NFI valuations - is the Canadian stock a cheap option?
When we look to NFI on a forward basis, there hasn't been this much positivity all year. In fact, the company is trading at around 63 times forward earnings, a rich valuation.
However, we are still in somewhat of a pandemic, and the company is likely going to face hardships in 2021 as well. If investors are patient and look towards 2022 and 2023, the company seems to be trading at a pretty steep bargain.
In fact, it is only trading at 18.3 and 13 times 2022 and 2023 earnings respectively. What this tells me is a lot of investors are willing to look past this year and instead into the future where the company's backlog is growing and prospects are starting to look optimistic.
Most analysts have a buy rating placed on NFI. In fact, out of the ten analysts covering the company, only 1 has a hold rating, with zero stating you should sell the stock. With targets in the $32.6 range, this doesn't provide much upside from today's levels, but it's also important to note that if it has more quarters like its recent one, it is possible that targets get raised upwards.
This is a company that is not trading at slam dunk levels in terms of valuations, but one that certainly does provide the opportunity to outperform over the medium to long term if it can get back to 100% of its pre-COVID operations and continue to take advantage of momentum in the EV/emission-less vehicle sector.
Moving on, one doesn't always have to be laser focused on new industries to find growth. Even established sectors like financials can experience evolution as new entities pop up to serve various needs. Goeasy Ltd (TSE:GSY) is a company we have watched closely.