NFI Group (TSX:NFI), also known as New Flyer, is a favourite among small cap growth investors. It operates in a niche industry and is one of North America’s leading bus manufacturers. The company has a reliable history of growing earnings and is on the verge of becoming a Canadian Dividend Aristocrat. These are companies who have raised dividends for five or more consecutive years.
New Flyer’s streak is at four years and it has averaged 20% dividend growth.
As a small cap it is prone to significant volatility, and it is not uncommon for the company’s stock to undergo significant price swings.
Unfortunately, the company suffered one of its most significant one-day drops in its history. On Monday, its stock fell by more than 10%. What happened?
New Flyer isn’t expected to announce second quarter results until August 13th. However, investors got a taste as to what to expect when the company reports. It isn’t likely to please investors.
On Monday, NFI Group announced it was reducing 2019 guidance on delivered equivalent units (EUs). The company expects a decrease of 150 units and guidance is now for 4,260 EUs in fiscal 2019, a 3.4% drop.
Likewise, it also announced that it delivered 1,029 EUs in the second quarter of 2019. This is a 150 unit drop from the previous year.
Unfortunately, the recent announcement builds upon missed production days and supply chain management issues experienced in the first quarter of 2019. This led to a significant 35% miss on first quarter earnings.
Are there more serious underlying supply chain management issues? It is certainly a worrying trend.
Likewise, the company’s book-to-bill ratio is also trending downwards. In the second quarter of 2019, the ratio stood at 89%, down from 91% in the first quarter and 98% in the second quarter of 2018.
Why is this important?
A book-to-bill ratio is a key indicator of supply and demand. A ratio above 100% implies more orders were received than filled. This implies strong demand.
The flip side is also true. A ratio under 100% is a sign of weak demand.
In its revised outlook, the company warned that it may continue to see a book-to-bill ratio below 100% in the near future. However, management believes there will be higher bid activity in 2019 and 2020 as compared to fiscal 2018.
There are two issues plaguing the company. For starters, the company hasn’t been able to rectify its operational issues from the first quarter. This is what led to the reduction in guidance.
As such, it is time to put management on watch. If they are unable to solve these issues by the end of the third quarter, there could be further blood in the streets.
Secondly, demand is slowing and aside from management expectations, there are no firm confirmations that bids will in fact increase.
Slowing demand and poor operational execution is a recipe for disaster. The company is now in show-me mode.