Canadian Edge is a newsletter that generally has given a lot of attention to energy and utility stocks and other companies with decent dividend yields, so my first thought when I saw they were teasing an “afterthought stock” was that it must be some misunderstood energy company that’s just beaten down because oil and gas prices are down…
… but it turns out that’s not the case — what’s being teased here is very mysteriously veiled, with Dittman not even willing to mention the industry in which the stock toils for fear of giving yours truly and all the amateur Gumshoes out there too much of a head start, but it turns out that it’s also a company I used to know pretty well. So we can indeed get an answer for you.
But first, to be sporting, let’s go through the clues… here’s how Dittman catches our eye:
“Shocking $11 “Afterthought Stock” Quietly Corners Exploding Market and No One Noticed
“A series of shrewd acquisitions has propelled this tiny company from an also-ran to a Market Titan. It happened so fast—and in an industry so few people
care about—that even Wall Street hasn’t caught on yet.
“But it will—and soon….
“Every day Brian Sanders wakes up, gets dressed and heads out the door for work in downtown Seattle, Washington.
“I doubt that Brian knows that what he does next is part of a market that’s hit a 57-year high.
“Or that he’s using the product of a company that’s quietly becoming an industry titan—right under the nose of Wall Street.
“But I’m sure he’d care if he knew its potential.Are you getting our free Daily Update
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“Because what I’m about to show you could easily help Brian—and you—turn $10,000 into $44,893… maybe more.”
Whatever could it be? He compares the potential of this industry to the move that Ford made when it recovered from near-bankruptcy at about $2 to the mid-teens following the “Great Recession” … and then we get some more clues…
“For a market that most people overlook, it sure has become popular. And for one tiny company I’m about to show you, it’s become immensely profitable.
“In fact, in 2013, Americans used this form of transportation over 10.7 billion times.
“The highest number in 57 years.
“And that’s no wonder when you know that an average American household saves more than $10,000 a year when they use the services this market offers.
“Here’s what one industry insider says about what’s happening: “This is a long-term trend. This isn’t just a blip” ….
“From 1995 to 2013, use of this market’s services grew over 37%….
“And these numbers are even more impressive when you know that 45% of our country doesn’t even have access to this form of transportation….
“It’s a $58 billion industry that employs nearly 400,000 people. And more than 7,100 companies are a part of it.”
So what is this secret “industry” that he won’t even mention in the ad? Buses. And I suppose bus transportation is somewhat of an afterthought for investors who are jazzed up by Tesla and airline stocks and other more exciting things, but it is a fairly big business.
And there is a stock that’s been “rolling up” the heavy-duty bus business in the US and Canada — a stock that we featured as an “Idea of the Month” back when it was trading as a strange sort of income security in 2009. This company being teased today by David Dittman is New Flyer Industries (NFI in Toronto, NFYEF)
I haven’t followed New Flyer since I called it a “sell” in the middle of their reorganization back in late 2011/early 2012, but the basic gist is this: They went public as a strange “enhanced income security” during the very brief window of that structure’s popularity in North America (there were only a dozen or so of them at their peak, I think), so if you bought the “EIS” in the mid-2000s you were buying a stapled security that included both a portion of high-yield debt and a portion of dividend-paying equity. In effect, back when I liked it you were earning a near-15% yield, payed monthly, and had the “backstop” of debt as part of that so you knew there was some downside protection in the event of bankruptcy.
But, of course, paying out a huge yield like that is hard in any business — and this is a heavy manufacturing business that depends on municipalities for most of their orders, so whenever bad news hit or a big order was canceled or delayed (as happened a few times in the recession, when some cities and towns were realizing that they were broke — particularly in California and housing-driven states) the company was under quite a bit of pressure to keep up their high dividend even though margins were problematic. So they started to reorganize, they shuttered the unwieldy income security structure and split their debt off into separate convertible debt, cut their dividend, and sold equity to straighten out the balance sheet.
And it worked out far better than I would have anticipated — I still liked the company in 2012, they had a strong market share then, and a good product that was well-received, and the US bus fleet was in need of renewal, but I was concerned that they’d lose investors when they stopped being a high-yield income investment and I didn’t know when the business might pick up in a real fundamental way (like with increased sales, or better margins).
Looking back now, it appears that things picked up pretty quickly — within a year they had done a lot to right the ship, and by 2013 the stock started recovering once their dividend cut in late 2012 was digested (they pay the same dividend now as they did then following the cut, 4.9 cents Canadian per month, though for US investors the dividend has effectively been shrinking as the Canadian dollar has fallen). They also did a couple mergers to consolidate the parts and aftermarket supply business, and one large merger with another heavy bus manufacturer, and got a strategic investment from a large Brazilian bus manufacturer… so thanks in part to recovering municipal budgets and in part to this consolidation, they were able to really improve the business, with a lot of the growth coming over the last 18 months or so.
What does it look like now? Well, the company is again paying out essentially all of their earnings as dividends (a little more than trailing earnings, a little less than forward earnings estimates, though it look like it should be sustainable at this rate given their cash flow), and they still have a fair amount of debt — but the debt pressure is fairly limited because it looks like a lot (maybe most, I haven’t scoured their books) of the debt is from their convertible bond offering a few years ago (ie, each bond turns into 100 shares at maturity — it doesn’t have to be repaid in cash. That’s CUSIP 64438TAA2, with a June 2017 maturity, if you’re more interested in debt than in equity).
So… it’s a much more stable company now than it was back in 2012 when I last looked at them in a lot of detail — but it’s also more expensive, partly because they’ve grown revenues considerably and stabilized the business and their market share with acquisitions, so it’s a very different investment now. Over the past five years the stock has gone up by 99%… though a lot of that is the faltering Canadian dollar over the timeframe, in US dollars the investment (not including dividends) would be up about 55%.
The transformation from a high-yielding security to a growth stock makes it hard for me to consider them dispassionately given my history with the shares, but it’s a decent yielder still (about 4% now) and analysts think they’re just at the beginning of increasing their earnings by 50% over two years… so if you think that’s a reasonable forecast, that they can boost earnings to near 75 cents this year and 90 cents in 2016, you can make a case for the stock at C$14 (yes, that’s about US$11), but it’s not cheap. This is a consolidation, forward growth, and “turning backlog into sales” story now — not a “bargain” even if it may be overlooked by some (it’s a small company, too, the market cap is well under $1 billion). They have razor thin profit margins, they do have some cool products that are selling well (electric and hybrid buses are the big push now), and the US bus fleet is still old and they have a big, high-margin parts business too, so there’s potential… and to some degree, they’ve also benefited from being an exporter from a weak currency to a strong one in recent years, though that is moderated by the fact that recent deals have significantly enlarged their manufacturing footprint in the US, including in Alabama.
Most of the charts and data in Dittman’s ad come from New Flyer’s most recent investor presentation, so you can check that out here to get started on your own research — sound like a worthy ride for your investing dollars? Let us know with a comment below.