Initiating Coverage on Blue Bird Corporation (BLBD US: Model)

Date of Initiation: 1/30/2025

Price Target: $50.76

Conviction: 7/10

Holding Period: 2 Year Hold

Model: BLBD US Blue Bird Corporation.xlsx

Blue Bird Corporation is a manufacturer of school buses in North America. They are one of three major players in the school bus space, competing against IC Bus and Thomas Built Buses. Both of their major competitors are consolidated into larger corporations. I pitched this idea for the BYU stock pitch competition and took first place alongside three of my peers. A one-sentence summary of our thesis is that school bus demand will be very strong over the next few years, and Blue Bird has the product offering that customers now want. They lead the market in "alternative fuel buses," which are really just non-diesel buses. We are particularly excited about their propane buses, as our conversations with dealers led us to believe Blue Bird's customers really love the product.

As mentioned above, we believe that school bus demand will be very strong over the next few years. This is due to two distinct reasons. First, the school bus fleet in the U.S. and Canada is much older than is healthy. Second, Blue Bird's bus products are supported by a slew of federal and state-level regulations attempting to modernize the U.S. school bus fleet. These views are reflected in the model I've built, with bus shipments being 150 and 200 buses over Blue Bird's 2025 and 2026 midpoint guidance. This projection allows us to reach a revenue CAGR 0.42% above sell-side consensus expectations.

Thesis 1: Aging School Bus Fleet

In the U.S. and Canada, 47% of school buses on the road are older than 10 years. For reference, that number was just below 30% in 2019. Blue Bird's customers, school districts, had bigger priorities in 2020 and 2021 than replacing their aging school buses. They had to ensure that children adapted to online learning, and the COVID pandemic made bus purchases a non-priority. We believe that school districts operating old buses will need to begin replacing them. It doesn't make fiscal sense for a school district to maintain an old bus, as yearly maintenance costs ratchet up in an unforgiving manner. It's estimated that a bus that is 6–10 years old costs about $5,500 to maintain per year. We know that this number gets much larger as the bus ages, and at some point, it makes sense to switch to a new bus. This is especially true when newer propane and gasoline buses have a lower cost of ownership.

This delay in bus replacements due to COVID has led to an industry-wide downturn in bus orders, which we believe will reverse in favor of the bus OEMs.

Thesis 2: Government Support

The primary piece of legislation that our pitch hinged on is a $5 billion carve-out of the Infrastructure and Jobs Act, which has been allotted to school districts to help them afford EV and alternative fuel buses. This funding is coming through a series of five rounds, of which one has been completed, and the funds from rounds two and three are in the pockets of school districts. Assuming that Blue Bird wins 30% of contracts (which is the number they have told the market they can win, and this makes sense given their approximately 30% market share), they will see about $1.6 billion in revenue from this act over its useful life. For a company that does about $1.5 billion in revenue per year, this is obviously material.

There are also a slew of other government-related programs that BLBD will benefit from over the next few years. My favorite to highlight is the 2027 EPA emissions changeover, which places stricter rules on the level of emissions that vehicles from model year 2027 and newer can release. This is beneficial to BLBD because their alternative fuel buses already meet these standards, but we don't know if their competitors have achieved this yet.

Why Blue Bird?

This is the most important paragraph. We believe Blue Bird is going to benefit the most from this increase in industry-wide demand over the next few years because of their dominance in alternative fuel buses. It is the product the customer wants, and they build it the best. In FY24, 60% of BLBD's buses sold were alternative fuel buses, while only 10–20% of buses sold by IC and Thomas Built were alternative. BLBD has already achieved the ability to sell alternative buses that consumers like at a higher margin than traditional diesel buses. As customers continue to buy the buses with the lowest cost of ownership, they will order from Blue Bird, which has established a major first-mover advantage in the alternative fuel school bus space.

Risks

Blue Bird has some counterparty dependency that is worrisome. They get their engines across the different powertrains from three different suppliers, so they could be materially impacted by a financial change in just one of them. They also sell to one kind of customer: school districts. A black swan event that leads to a nationwide fall in property taxes would severely damage the wallets of all of Blue Bird's customers.

The biggest risk in my eyes is the regulatory environment. The new administration seems very willing to cut spending wherever it makes sense, so it wouldn't shock me if they cut rounds four and five of the EPA funding. I don't think this is a huge issue for the stock, though. When Trump paused all federal grants in late January, including the grant that BLBD benefits from, the stock only moved down 1%. I believe that the regulatory risk is already priced in, so any good regulatory news is gravy. Furthermore, BLBD's supply chain is based in the U.S., so tariffs aren't an issue. They also claim that Trump is very pro-American manufacturing, so cutting funding for an industry that creates many American jobs wouldn't align with his views.

Conclusion

To conclude, BLBD will benefit from an industry-wide increase in demand due to a higher bus replacement rate and positive government backing. This increase in demand will benefit BLBD the most because of their strong product offering, which is poised to be the product of choice for the next generation of bus purchases. I recommend a two-year holding period with a price target of $50.76, which implies an annualized return of approximately 17%.