One of my favorite books I’ve read in the past few years is Mohnish Pabrai’s The Dhando Investor. Since reading this I’ve devoured all of the great articles and YouTube videos that are out there outlining Mohnish’s value philosophy (I posted links to some of my favorites at the bottom)*.
This article is due in part to Mohnish. One of his larger holdings is in GM and not directly through the common stock but through the company’s 2019 warrants. The warrants trade under the ticker GM/B and give the right to buy GM common stock at $18.33 per share. In essence it is a levered bet, so instead of buying 27 shares with $1000 you can control 54 shares with the same amount of capital. I really liked this idea and it follows Mohnish’s saying of “Heads I win, Tails I don’t lose much.” I’ve never gotten myself around to buying the GM warrants, although I’ve been very close many times. This did, however, inspire me to purchase the company I’ll be writing about today.
Blue Bird Corporation (BLBD) manufactures and designs school buses. The North American Type C and D bus market is controlled by three players: Blue Bird, Thomas Built Buses, and IC Bus. Blue Bird the only independent company of the three. Thomas Built Buses is owned by Daimler and IC Bus is owned by Navistar. In 2016 the market share was divided as such: Thomas Built Buses 35%, IC Bus 34%, and Blue Bird 31%. I think it is safe to say that the North American Type C and D bus market has a fairly deep moat around it. Schools have trusted Blue Bird since the 1920s and its dealership networks are very entrenched (leading to 90% of sales). Not only do I think the company has a pretty deep moat around it, I also love the warrants available under the ticker BLBDW. Each warrant gives the right to purchase 0.5 shares for $5.75, (2 warrants for 1 share at $11.50).
As of market close on 1/27/17, the underlying common stock was at $16.95, implying a market cap of $383mm. The warrants were trading at $2.75.
The bus industry hit a trough in 2011, as there were only 23,821 Type C/D registrations, significantly below the mean since 1985 of 30,500 annual registrations. As the industry has recovered, Blue Bird has consistently gained market share. In 2010, Blue Bird had a 23% market share, rising to 31% in FY2016. This has been driven by the company’s significant dealer network within the U.S. as well as leadership in the alternative fuels space, offering propane, gas, and CNG buses. In FY2016 Blue Bird’s sales of propone vehicles increased 33%. I think Blue Bird’s leadership in alternative fuels will help drive outperformance for the company going forward.
It is important to note that Blue Bird has a large majority shareholder, private equity firm American Securities. They own 53% of the common stock and it is worth mentioning that they attempted to purchase the other 47% in the summer of 2016. American Securities had offered to pay $12.80-13.10/share for the remaining shares it didn’t own, an offer that was rejected by a special committee formed by the Board of Directors.
Blue Bird is projecting 2017 sales to rise 6% to $980-1,010mm, EBITDA to rise to $72-76mm and FCF to rise to $38-42mm. At an EV/EBITDA of 6.5x, a FCF Yield of ~10%, and a forward P/E less than 12x, the stock and warrants seem very attractive. Given Blue Bird’s position in an industry that has a deep moat and multiple avenues for future growth (alternative fuel buses, sales to the commercial market, potential for development of an electric vehicle) I feel that shares and warrants present a great value at current prices.
https://www.youtube.com/watch?v=IOoaNYQHaYY (Mohnish Pabrai at lecture BC)