$SHYF – The Shift Group – A first look

cross-posted to r/ValueInvesting

The Shift Group ($SHYF) is a company that manufacturers chassis for specialty vehicles and assemblies for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. They've been in business since 1975. They split their business into two reportable segments: Fleet Vehicles and Services (‘‘FVS’’) and Specialty Vehicles (‘‘SV’’), and they own: Utilimaster, Royal Truck Body, DuraMag, Blue Arc, Magnum, Strobes-R-Us, Spartan RV Chassis, and Builtmore Contract Manufacturing. Commercial vehicles are sold under the Aeromaster®, Velocity, Trademaster®, and Utilivan® product brand names. The industry sector is cyclical, but they report that their diversification across several sub-sectors reduces the overall risk becuase of the various markets served tend to have different cyclicality.

They've recently introduced Blue Arc, a division that is building is a complete battery-electric, Class 3 truck. As of this writing and with production planned to start on 2023, they are the only company specifically in the Class 3 EV Chassis environment. Class 3 vans weigh 10,001 to 14,000 pounds and have additional licensing requirements over Class 2 vehicles. In general, they are designed to last 15 years or more and meet warehouse dock heights for loading and unloading.

The FVS segment accounts for 66% of the sales, while the SV segement makes up the other 34%. Over the past five years sales have increased by $587.6 million, a compound annual growth rate (CAGR) of 25.2%, while income from continuing operations has grown by $52.5 million, a CAGR of 41.4%, and Adjusted EBITDA has grown by $76.4 million, a CAGR of 35.9%.

On February 1, 2020, they completed the sale of their Emergency Response Vehicle (ERV) business. In September 2020, that deal was finalized with a recognized loss on sale of $3.3m for the year ended December 31, 2020. The ERV business included operations in Charlotte, Michigan, and operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. This segment had been a losing proposition for a number of years.

Specific Risk Factors to the business:

• Concentrated customer base/sales: In 2021, Amazon accounted for 25.1 percent of consolidated sales. Their top 10 customers accounted for 60.6 percent of sales. I believe they are diversifying their customer base, but as I'm writing this I am struggling to find the numbers to support my memory.

• Implementing a New Information Technology System: short-term issue. Multiple locations are being upgrade to a new system. It could affect production if something goes catastrophically wrong. Having been through bad ERP software changes, I think this a low risk to the long-term.

• Supply Chain Disruption: This is simply a problem for everyone right now. If they somehow fall behind as things improve in the future, then this could be a serious issue.

• Rising Interest Rates and Material Costs: Aluminum and energy costs are increasing. At this time analysts are projecting decreased EPS in 2023. It could be a rough 12-24 months in the market as a result. This is not really a problem for a long-term investor. Could be more of an opporuntity if it comes to that.

Some of the numbers:

• Market Cap: 873.23M (current)

• PE Ratio: 20.92 (current)

• PS Ratio: 0.88 (current)

• P/FCF: 34.03 (as of 12/2021)

  • Free cash flow in the first two quarters of 2022 have declined, however, this seems to be an annual trend. I believe they front load some of their annual cash outflows. I'm still working on this hypothesis.

• Current Ratio: 1.74 (current)

• Quick Ratio: 0.56 (current)

• Debt / Equity: 0.58 (current)

• ROE: 17.60%

• ROA: 9.30%

• ROIC: 17.20%

Thesis

This company has very little debt and nearly $1billion in sales backlog. This is a 100% increase since the prior year with a 46.7% increase in Revenue YoY. I believe it is well positioned in the inflationary environment we find ourselves in. I believe they have brand recognition in their sector, and a first mover advantage in the subset of Class 3 EV vehicles. They have a tremendous capital allocator in CEO Daryl Adams. He has laid out a sold plan for this company since coming on board (this is also a weakness to the thesis).

A Value Investors Club write up by a long-time member states, “Growth in the size of major fleet cariers from 250,000 units in 2020 to 450,000 in 2025.(12% CAGR). The growth is from a 100k retiring/replacement cycle and 200k market growth. This is all per a comissioned 'third party study'. The growth is expected to come from a 7-10% CAGR in parcel delivery volume via growth in e-commerce through 2025. The company estimates that Covid had pulled e-commerce adoption curve forward by 2-3 years.” In the past 6 years, Revenue had grown at a 16% CAGR. This leads me to believe they are positioned to take advantage of this projected growth. Optimistically, they'll increase their market share.

Valuation

I have two simplified valuations that put the current intrinsic value between $32-$40 per share. Due to my inexperience I apply a ~40% margin of safety, which puts it at a buy between around $20.00 to $24.00 per share.

What do you think?

• What do you feel I've gotten right?
• What do you feel I've gotten wrong?
• What have I missed entirely?