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New Flyer: A look at one of Canada's biggest stock market success stories

Winnipeg-based New Flyer, North America’s largest manufacturer of heavy-duty transit buses, has gained more than 25 per cent since January and about 43 per cent over the past year.

Karen Scarsbrook/New Flyer Industries

New Flyer Industries (NFI-T)
Revenue (2016): $2.3 billion (U.S.)
Market cap: $3 billion
Number of employees: 5,100

About 20 minutes west of downtown Winnipeg, in a 104-year-old rail yard, sits the headquarters and main factory of New Flyer Industries, a venerable bus manufacturer that has become one of Canada's biggest recent stock market success stories. The company reports in U.S. dollars, and last year it surged past $2 billion in revenue and increased its profit by 131%. It now owns about half of the North American bus market, making it the largest player in its industry. "It has the dominant position, and that turns a decent business into a great investment," says Jeff Mo, a portfolio manager with Mawer Investment Management.

New Flyer opened its doors in 1930, and it's had its ups and downs over the decades. The most recent rough patch came during the Great Recession. The company weathered 2008 and 2009 by filling previously placed orders, but then its revenues sagged by almost 13% between 2010 and 2012. New Flyer serves 24 of the 25 largest cities in North America, and many of them stopped replacing buses during those years.

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One thing saved the company from bleeding further: CEO Paul Soubry, who took over in 2008, implemented lean manufacturing methods and committed the company to continuous improvement. "The facilities used to be dark and dingy, its IT systems were not ideal. It wasn't [set up] for the grassroots running of a business," he says. "So we optimized the factory." Manufacturing speed, operating margins and nearly every other metric have improved since 2008. "It became a best-in-class manufacturer," says Mo.

New Flyer has also bought two big rivals: Alabama-based North American Bus Industries, in 2013, and fellow Winnipeg bus maker Motor Coach Industries (MCI) in 2015, for $455 million (U.S.). "That was a transformational acquisition," says Trevor Johnson, an analyst with National Bank Financial. MCI broadened New Flyer's customer base. It makes buses for commercial customers, including Greyhound, as well as regional transit systems, such as the Toronto-area GO network.

The big jumps in New Flyer's revenue and profit last year were due to the addition of MCI. Industry growth tends to be much more modest, however—single digits. As cities modernize their bus fleets, the environmental impact is also a high priority, and New Flyer makes hydrogen, natural gas, electric and hybrid models. New Flyer expects to make and deliver 3,650 new transit buses in 2017, a 4% increase from the year before.

The motor coach industry is more uncertain. Low-cost flights are eating into intercity bus travel in the U.S., which accounts for about 37% of industry revenues, says CEO Soubry. However, as more people retire, the charter and tour segment, which accounts for 55% of the market, is picking up. "The aging population is offsetting the losses in the point-to-point segment," he says.

The key to New Flyer's earnings growth, though, will be its implementation of Lean Six Sigma methods in MCI's manufacturing operations and its maintenance and repair business. MCI is only just starting the process. Trevor Johnson thinks Soubry can cut about $25 million in costs there over the next two years. Jeff Mo says that if the cost-cutting is successful, New Flyer's bottom line could grow by double digits over the next few years.

Investors should be mindful of valuations, however. New Flyer's shares have been trading at about 18 times its current earnings recently, which isn't cheap, but is in line with the broader stock market. The firm's order backlog is at record levels, and Johnson says there are a lot of easy things the company can do to improve margins. "[The valuation] is a bit aggressive, but we feel good about the backdrop," he says. The company's dividend yield—about 2% at recent share prices—is also modest, but Soubry says he hopes to raise the payout.

Soubry is also going to keep looking for acquisition opportunities, perhaps expanding overseas. "We may look outside of North America for some diversification," he says. "This Winnipeg company is growing up."

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