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NFI Group Inc., formerly known as New Flyer Industries Inc., should be in the sweet spot of Canadian industry right now. The company builds energy-efficient buses that run on everything from natural gas to electricity.

Its products are in demand across North America as more municipalities opt for low-emission or emission-free technology to meet mass transit demands.

But somehow, things aren’t going right for this Winnipeg-based company. The stock (NFI) has been in free-fall for much of the past year, dropping from $52 last September to $30.16 on Monday, a loss of 42 per cent. The dividend remains unchanged at 42.5 cents a quarter ($1.70 a year), providing an attractive yield of 5.5 per cent. But the sharp decline in the share price has many investors worried.

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So, what’s happening? Earlier this month the company released its second-quarter report on deliveries, orders and backlog, and it offered some insights into the problems plaguing NFI.

The company revealed that deliveries of all products in the second quarter were down 11 per cent year-over-year to 1,029 vehicles or, as the company refers to them, “equivalent units” (EU).

Supply delays, missed production days and postponed customer acceptance inspections contributed to the decline, chief executive Paul Soubry said in a company news release.

He expressed confidence that deliveries would pick up in the second half, but the company adjusted its full-year guidance downward. It now expects to deliver 4,260 EUs this year, a decrease of 150 EUs, or 3.4 per cent, from previously reported expected deliveries.

Second-quarter profits, to be released Aug. 13, will be affected by the delivery slowdown.

Even more alarming is the dramatic drop in new orders, which are down 52 per cent year-over-year from 6,303 (firm and options) in 2018 to 2,997 in the second quarter of this year. The company expects more bids in the second half but cautions that “the individual awards are expected to be smaller in size with fewer options or shorter contract terms as transit agencies develop plans for future battery-electric vehicle adoption."

Stephen King, NFI’s group director, corporate development and investor relations, explained in a phone interview Monday that the company is seeing more small orders for pilot projects as municipalities gear up for an eventual transition from traditional gas/diesel buses to electric vehicles. These may amount to only 10 to 40 units compared with orders of 300 to 400 in the past when no new technology was involved.

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“It’s not just the cost of the new buses that has to be budgeted,” he said. “It’s the expense of putting into place the entire infrastructure system to support them.”

Another worrisome sign is that the backlog is declining. At the end of the second quarter, NFI’s total backlog was 9,997 EUs (valued at $4.8-billion) compared with 10,587 EUs (valued at $5.2-billion) at the end of the first quarter.

The company also reported problems with its new US$28-million fabrication plant in Kentucky, which makes parts and components. The operation has been slow to reach operational goals and the company has replaced top management and “deployed additional resources to improve operational execution and efficiencies." But NFI acknowledged that the Kentucky facility will be a drain on earnings until at least 2020.

All in all, it’s a very discouraging picture of a company that should be doing much better. Perhaps management will get this sorted out, but the financial results for the rest of this year are not likely to offer reasons for optimism. The yield is very attractive, but the risk of a further decline in the share price is significant.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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