Cross-posted to r/valueinvesting:
Around October last year I posted a first look at The Shyft Group. I do own stock in the company today and, with the 2023 Q3 Earnings release, thought a follow up was in order. It serves as a really good journal/record of where my thinking was and where it is today.
The Shift Group ($SHYF) is a company that manufacturers chassis for specialty vehicles and assemblies for the commercial vehicle and recreational vehicle industries. They've been in business since 1975. Brands they own include: Utilimaster, Royal Truck Body, DuraMag, Blue Arc, Magnum, Strobes-R-Us, Spartan RV Chassis, and Builtmore Contract Manufacturing.
The Bad and The Ugly
The high interest rate environment and recession fears have certainly had an impact. Earlier in the year, management reported cancellations and delayed orders as a result. Production of the Blue Arc EV Trucks has been delayed until 2024, due to a quality issue with their supplier's battery packs. They've reported sales of $201 million for the quarter, compared to $286 million for Q3 2022, representing a ~30% decline YoY. Net income suffered a 74% decline YoY with Q3 2023 posting $4.5 million, compared to $17.3 million in Q3 2022. The diluted earnings per share for the quarter stood at $0.13, down from $0.49 in the same quarter of the previous year. The backlog sits at $464 million, down from around $1,000 million YoY. They are currently expecting full-year earnings in the range of $.42-$.56 per share, with revenue in the range of $850 million to $900 million.
The Good
It is not all bad news though. TTM, they've posted a respectful ROE of 11.00% and ROIC of 8.76%. Meanwhile, free cash flow is now sitting at $48.09 million, compared to -$39.26 million at the close of 2022. Long-term debt is stable YoY, standing at ~$94 million. The company also repurchased $10.3 million of shares during the quarter, as a part of their $250 million share buyback plan announced in Feb 2022. They also finalized an agreement with Rush Enterprises, which operates the largest network of commercial vehicle dealerships in North America, to sell and service the Company’s Blue Arc™ Class 3, 4 and 5 all-electric delivery vehicles.
And More
The company has appointed John Dunn, as President and CEO of the Company, effective 10/26/23. Dunn, who previously served as President of Shyft’s Fleet Vehicles and Services, will also join the Board of Directors. In connection with the Company’s previously announced leadership transition plan, Daryl Adams, current President and CEO, will step down from his role and resign from the Board in the next 6 months.
Some of the numbers:
- Closing Price 11/03/23: $11.38
- Market Cap: $390.22
- PE: 14.05
- Forward PE: 34.51
- PB: 1.53
- Current Ratio: 1.70
Thesis
There is some more pain ahead. I have to believe at some point the high interest rates will slow everything down. This will lead to a decline in e-commerce, slowing down deliveries, which will decrease demand for new trucks. Additionally, the RV market exploded during the pandemic leading to a post-pandemic softening in those sales, and I don't expect the situation with RV(s) to change for a couple more years.
I hold that $SHYF is positioned well to weather a macro decline in the economy and a softening in the RV Segment of the business because I believe the balance sheet of $SHYF is strong and the long-term debt is manageable. I am hopeful that the production of the Blue Arc line can be realized in 2024, as they address the battery issue with their suppliers.
Last Mile Delivery demand in the US is forecasted to grow by CAGR of 8.8% from 2023 to 2030 and will drive demand for more delivery trucks. In 2022, Class 3-5 Trucks made up 55% of the US market for Classes 3-8, with Class 3 representing 80-90%. Jumping to the world wide market, Class 3 Trucks make up 90% of Class 3-8 Truck market and are estimated to grow at 9% CAGR from 2023 to 2032. The Utilimaster gas/diesel line demand is steady, and 82% of Shyft's current backlog is in Fleet Vehicles and Services (Class 3-5 Trucks) segment of the business. The launch of EV(s) in the Class 3 market and the hunger for EV(s) are driving a portion of the growth/demand in this class of trucks. I believe Shyft is well positioned with the Blue Arc EV line covering Class 3, 4, and 5. The catalysts will be: their position coming out of the current economic uncertainty and a possible economic decline in 2024, the Utilimaster Brand recognition, Blue Arc going into full production in 2024, the deal with Rush Enterprises, and the growth of the Class 3-8 market that will be driven by Last Mile Delivery demand/growth.
Valuation with 30-40% Margin of Safety
Averaging EPS over 3 years, I'm pricing the company between $11.25 – $13.00. Using a simplified DFCF, with the FCF averaged over 51 years, it sits around $9.50-$11.00.
1 – FCF has been less stable YOY, so I'm attempting to smooth it out some.
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