With the economy expected to show a slower pace of growth in the next few quarters, investing in companies that have an outsized order backlog makes a lot of sense. I like the idea of a company having a couple years of business already in the pipeline when the risk of even a mild recession is at hand.
Enter New Flyer Industries (NFYIF), a Canadian-based company that's the largest maker of mass transit buses in North America. It does about $800 million in annual revenue with a backlog of $3.1 billion going into 2008.
The company offers the broadest product line in the industry with alternative-fuel drive systems, electric trolleys, gasoline/electric and diesel/electric hybrid vehicles, as well as its proven and reliable diesel buses.
Customers include the New York and Chicago Transit Authorities, as well as shuttle buses for airports, car rental agencies, park-and-ride facilities and universities. This is a very straightforward and transparent business, and right now the mass transit bus industry is in the midst of a strong multi-year cycle.
As a result the company's Income Deposit Securities (IDS) are paying out a juicy 9.75% return with a comfortable 84% payout ratio on a 22% rise in 2007 revenues and a 30% rise in profits. Sweet! Each IDS consists of one common share of NFYIF and $5.53 (Canadian) principal amount of 14% subordinated notes of NFI ULC, an indirect subsidiary of NFYIF.
Higher production and delivery levels in response to the company's growing order backlog, and continued strong growth in aftermarket operations, resulted in consolidated revenue for 2007 Q3 of $202.6 million. That's an increase of 26.2% compared to consolidated revenue for the Q3 2006 of $160.5 million. The company's sales are split evenly between the United States and Canada.
Bus-only manufacturing revenue in Q3 2007 was $181.3 million, an increase of 26.8% over bus-manufacturing revenue of $143.1 million in Q3 2006. Total bus deliveries in Q3 2007 were 466 units, representing a volume increase of 18.9% compared to Q3 2006 when 392 units were delivered.
This increase in delivery volumes is due to the significant improvement in the firm-order position throughout 2006 and 2007. Some of the increase in bus manufacturing revenue came from a product sales mix and passing cost increases through to customers.
Third-quarter 2007 aftermarket operations revenue was $21.3 million, an increase of 21.9% compared to the $17.4 million in Q3 2006. The growth in the aftermarket operations was a result of increased market share. New Flyer buses have an increasing share of the active bus fleets in the United States and Canadian market.
New Flyer went public in August 2005 at $10 per share. Today the stock is trading at $12 and is kicking out a monthly dividend of 9.75 cents per share, or $1.17 per share on an annual basis. The total distribution of 9.75 cents per IDS reflects a cash dividend of 3.3 cents per common share and an interest payment of 6.5 cents per $5.53 principal amount of subordinated notes from Dec. 1, 2007, to Dec. 31, 2007.
That means the other $6 per unit that makes up the total unit price is the value of the common stock. Between the interest on the debt and the dividend on the common shares, the units are able to pay out 9.75% yield on the monthly dividend.
During Q3 2007 New Flyer generated distributable cash of $18.4 million and declared total distributions of $13.2 million. That means distributable cash exceeded total distributions by $5.1 million. By comparison, Q3 2006 distributable cash totaled $16.6 million and NFYIF declared total distributions of $12.1 million with a surplus of $4.6 million.
Distributable cash on the rise demonstrates strong operations, and Q3 2007 results show solid fundamentals are in place for New Flyer Industries. Since its IPO, the company has generated distributable cash of $126 million and distributions of $104.8 million, resulting in a cumulative surplus of $21.2 million.
In May the company increased its payout on the IDS units, reflecting rising profit growth of operations. As the current robust cycle matures, we should see further increases in the monthly distribution.
Mass transit is a must-grow industry in evermore-crowded American cities. And New Flyer is a leader in green and clean fuel systems that are utilized in today's fight against pollution. Demographic growth in the United States and increased spending by municipalities to improve mass transportation favors an increasing demand for mass transit vehicles and portends a long-term secular market for companies that are benefiting from this growth and demand.
Take a full 3% position in New Flyer Industries (NFYIF) and buy it up to $13. I recommend you use a limit order, as the price showing in your broker service may be lagging some. Also, note that this is a Canadian company and distributions are subject to a 15% foreign withholding tax, as well as the fluctuation in the Canadian dollar -- which today is about 1-to-1 with the U.S. dollar.
If you buy the stock in a cash account, you can recover the 15% withholding by claiming a "foreign tax credit" on your tax return, but you can't recover this tax in a retirement account. Please keep that in mind when tax time comes around.
I'll see you later today with the Weekly Update.
Bryan Perry
Editor The 25% Cash Machine