Description

How many market leaders in essential industries can you find selling for 5x EV/EBITDA with growth ahead of them?  In my opinion, these are rare finds, but I think Blue Bird (BLBD) is one.    

Blue Bird Corporation (BLBD) is a materially undervalued school bus manufacturer that is in the early innings of both a company specific and industry resurgence.  The business has several catalysts that provide several ways to drive shares substantially higher in the next 12 months.  BLBD is also a likely M&A target for potential acquirers several years down the road.  A recent IPO with little fanfare coupled with dense inside ownership make the opportunity highly timely today.  How many market leaders in essential industries can you find selling for 5x EBITDA with growth ahead of them that could easily double and possibly triple in the next 2 years?

Why is Blue Bird Interesting?

·         Valuation.  EV/EBITDA < 6x coupled with margin and cycle expansion and FCF deleverage. 

·         Aligned and motivated insiders.  Cerberus 37%, management 8%, Coliseum Capital 16%

·         Early in the cycle.  If cycle runs for another 3-4 years, sales and profit upside is significant. 

·         Propane opportunity.  First mover advantage; propane buses are more profitable (mix shift higher).

Company Background

The Blue Bird Body Company was founded in 1927 as a manufacturer of buses using the model-T frame.  Until 1984, was run by several generations of the Luce family.  In 1992, Merrill Lynch Capital Partners purchased a majority stake in an MBO, and changed the name to Blue Bird Corporation.  In the 15 years that followed, the company deworsified into non-bus businesses and levered up, eventually resulted in a bankruptcy filing in 2006.  Cerberus Capital Management acquired Bluebird in 2006 and returned the company to its roots by focusing solely on school buses.

In September 2014, after reviewing over 125 businesses for purchase, Hennessy Capital used its SPAC capital to purchase a majority stake in Blue Bird from Cerberus.  In February, Blue Bird began trading on the Nasdaq under the ticker BLBD.

Blue Bird has gained 7-8 points of market share, going from 23% in 2010 to 30-31% today, largely on:

·         Better data mining (analytics to determine where market share low)

·         Upgraded dealer network

·         Propane (2-3 points of share gain are attributable to propane)

Industry Overview

The U.S. school bus industry is dominated by three companies:

Blue Bird

Thomas Built (Daimler)

IC Buses (Navistar). 

There are 15,000 school districts in North America operating over 500,000 school buses.  Over 25 million children ride buses or 55% of the K-12 population.  Students take 10 billion trips per year, which is more than transit buses.  The numbers have not changed much over the years, though they have crept up a little over the past two decades with population growth.  Public schools comprise 92% of the market. 

School districts are 80% of the buyer market, with contractors representing the remaining 20%. Buying new school buses requires significant capital outlays (buses are $82,000 brand new).  About two-thirds of school buses are run by school districts (in house) and the remaining one-third is outsourced.  School districts have increasingly begun outsourcing transportation to school bus service companies.

Buses wear out every 8-10 years generating a natural replacement cycle.  The average age of the overall school bus fleet fluctuates between 8 and 9 years.  Over two-thirds of buses in operations average 10,000 to 20,000 miles per year (most are not sitting idle).  The average life of a school bus is 12-15 years, after which the maintenance costs become quite significant and buses are typically retired.  Over the past three decades, annual new bus production has ranged from 23,822 (2011 low) to 37,641 (2001 high) with a 30-year average of 30,550 units.  Currently, production is running just below the mean at around 29,000 units, and management believes we are in the early innings of the cycle recovery. 

See page 20 of the attached: http://investors.blue-bird.com/Cache/1500068968.PDF?Y=&O=PDF&D=&FID=1500068968&T=&IID=4042668

Over 90% of funding comes from the local and state levels, and are highly correlated to property tax values.    Residential property values bottomed around the second quarter of 2011 and are up 40% off their lows. 

The Propane Opportunity

Over 95% of school buses run on diesel, but this is changing.  Increasingly, school districts are switching to propane fueled buses due to the following benefits: 1) lower fuel costs (20-30% lower), 2) cleaner burning, 3) start more quickly in the winter. 

Blue Bird has a significant first mover advantage in propane, commanding 99% of the propane market.  Both Thomas Built and IC Buses have announced that they will be building propane-fueled buses but those will not be ready for another 6-12 months, and BLBD management actually sees these actions as a validation of the propane market. 

A new Type C bus sells for around $82,000 but a propane bus fetches about $6,000 more and carries higher gross margins.  The incremental cost is justified by the lower fuel cost (2-3 year payback period based on propane vs diesel differential).  There are approximately 2,824 propane fuel stations in the United States. 

The cycle

Nearly three quarters of school districts purchase only new buses and a recent survey by School Bus news says that close to 70% of school districts are buying more or the same number of buses in the upcoming year. 

Financial Strength

BLBD has $80mm of liquidity but is also expected to generate $60mm of free cash flow in the next 9 months which will reduce Net Debt/EBITDA from 2.5x to 1.8x which may flex back up to 2.2x during Q1/16 (seasonal cash burn).   Covenants call for Net Debt/EBITDA of 4.5x or below so BLBD has plenty of covenant cushion. Debt maturities are in 2020.  BLBD also has an unfunded pension which is frozen but requires $5mm of cash contribution each year.

Regulatory

The National Highway Transportation Safety Association (NHTSA) is the federal regulatory body for the industry and for years has recognized that the safest way for children to travel to school is by bus.  There are 35 safety regulations currently in place (but no seat belts?). 

Valuation

·         $10 stock price * 21.7mm shares = $217mm market cap

·         $197mm net debt at the end of Q1/15 but FCF next 3 qtrs should approximate $60mm so Net Debt should be $137mm on 9/30/15 (FY 9/15)

·         Enterprise Value on 9/30/15 ~354mm

·         FY 9/16 EBITDA should be around $80-$85mm (FY 9/15 is $72-75) based on unit growth and margin gains (for context, long term EBITDA margin goal is 10%). 

·         EV/EBITDA = 4.4x on 9/16 numbers. 

·         Every EV/EBITDA turn is $3.70 per share ($80/21.7), so the following applies:

o    6x $80mm EBITDA = $15.81 (56% upside)

o    7x $80mm EBITDA = $19.49 (93% upside)

Catalyst

Valuation.  EV/EBITDA < 6x coupled with margin and cycle expansion and FCF deleverage. 

Aligned and motivated insiders.  Cerberus 37%, management 8%, Coliseum Capital 16%

Early in the cycle.  If cycle runs for another 3-4 years, sales and profit upside is significant. 

Propane opportunity.  First mover advantage; propane buses are more profitable (mix shift higher).