It’s time for another edition of MSFTs In Action, where I deconstruct a stock to determine whether or not it is trading at a discounted price.
For today’s installment, I focus on a company that’s been pioneering the way America commutes for close to a century.
NFI Group (formerly known as New Flyer Industries) is the largest bus and motor coach manufacturer in North America.
It was the first company to introduce low-floor buses, as well as those powered by natural gas and hydrogen fuel cells.
Now it’s once again leading the market—this time with its selection of electric buses.
Will this be enough to lift the stock from its recent decline?
Let’s find out… by applying my MSFTs filter.
Bus and coach manufacturing is a highly cyclical industry… and, therefore, directly affected by changes in the economic cycle.
During a slowdown, unemployment rises, and tourism and business interaction decline. All of these factors equate to fewer bus and coach passengers… and reduced demand for transport vehicles.
Moreover, during such times, municipalities’ income also drops, meaning they are unlikely to spend money upgrading their bus fleets.
Given this, right now, NFI has reason to worry. Economic growth in its key markets—the United States and Canada—is slowing. The question is: To what extent?
Lately, we’ve had positive news.
China and the EU have both injected their economies with fresh stimulus. This will benefit the U.S. and Canadian economies.
Furthermore, the Federal Reserve has indicated that it will keep interest rates low… another positive sign for growth.
Now it all comes down to whether the United States and China can reach a new trade agreement.
I believe they will. Both sides have too much to lose not to. When that agreement is reached, talks of a possible 2019 recession will die down… which will benefit cyclical stocks.
Macro Conditions: Pass
Urban sprawl is a global phenomenon that shows no signs of slowing down.
For the first time in history, more people live in cities than in the countryside. At the current pace of population growth and migration, the total area on our planet given over to cities will triple over the next 40 years.
This means the need for new infrastructure, roads, and public transportation networks will continue to expand, as well… including the demand for buses and coaches.
The world is moving toward greater use of electric vehicles. This trend is particularly evident in cities, where pollution levels can be high.
NFI recently unveiled Xcelsior CHARGE H2, the first fuel-cell-electric heavy-duty transit bus eligible for federal funding. It has a range of up to 300 miles and refuels in only 6 to 20 minutes.
NFI already has significant orders for zero-emission buses from major cities like Toronto, Boston, Minneapolis, New York, Portland, and Vancouver. Moreover, it has already sold almost 80 electric buses in California, including in Los Angeles.
Sector Potential: Pass
At first glance, NFI has solid fundamentals.
Revenues and operating income are growing steadily, and the company looks like it’s trading at a fair price. Price-to-earnings ratio stands at 9.33, price-to-book at 1.73, and price-to-free cash flow at 14.35.
Moreover, NFI pays a 42 cents per share dividend, which amounts to a yield (forward) of 5.02%. The company hasn’t missed any payouts and has been growing them for the last three years.
However, the company has too much debt.
So far, it’s managing it well. But should the economy slide into recession, I question NFI’s ability to cover interest expense. They had that problem in 2007 and 2008 and, as a result, were barely getting by until 2012.
Interest rates are rising, and I prefer companies that err on the side of caution when it comes to debt.
NFI stock has been on the decline since March 2018, when fears of global slowdown first reared their heads.
Furthermore, the stock failed to recover any losses in any of the market’s recent rallies. Since its March 2018 high, its value has declined by 49%, while the S&P 500 overall has gained 7%.
Right now, the price is forming a double bottom. Risk-taking investors might be looking to enter at this point.
I am not one of them… and I never try to catch a falling knife.
I prefer to wait for a confirmation signal, which, for NFI, would be the price breaking out above the previous resistance level of $37.50.
Tigger Price: Fail
NFI is not a misfit, but it is close to being one.
Both macro conditions and sector potential are stacked in its favor. The problem is the high level of debt.
Should the company decrease its debt, I believe the market would receive the news positively, and the price would break above $37.50… in which case, I would consider NFI a proper misfit, all else staying equal.