New Flyer Industries (TSX: NFI)
Although the stock market had a bit of a run over the last couple of months, most investors are still flocking to stable stocks. However, as the world’s fiscal health improves, you should be digging around for companies that are more economically sensitive but still undervalued because of the beating they took during the recession. As the economy improves, the stock prices on these types of businesses often climb higher than the more defensive operations.
One of those companies is Winnipeg’s New Flyer Industries. The small-cap business makes what it calls “heavy duty” transit buses and it has a number of U.S.-based clients. The buyers of these buses are, mostly, cities, many of which were hit hard during the downturn. Revenues dropped, orders fell off and the company was forced to cut its dividend in half last summer.
While that may sound bad, keep in mind that the bus industry is one of the oldest sectors around. Cities also need to continue upgrading their transit systems, so while there may be spending pauses during tough economic times, that money has to be spent at some point. Plus, with New Flyer being one of the top bus manufactures in North America, it’s reasonable to think that much of those dollars will flow NFI’s way when the time is right.
It seems as though 2013 could be their year. In Q4 2012, the company took 1,055 new orders, a dramatic increase over the nine new orders it received in the same quarter the year before. In January, it received a $116 million investment from Brazilian bus manufacture Marcopolo S.A., which, say analysts, gives the company money to make some strategic investments of its own. So things are looking up.
Many investors are already taking advantage of the company’s rebound—its stock price is up 20% year-to-date—but with a price-to-earnings ratio of 9.85 times, its still quite cheap. The share price is currently around $10.34, but analysts at National Bank Financial and PI Financial Corp. think it can hit $11 and $11.50, respectively.
Something else to consider: The company still pays a 5.66% yield, which Leslie Lundquist, an income-focused portfolio manager at Bissett Investment Management, doesn’t think will get slashed again. So even if the stock takes a dip at some point—and it could, depending on how the economy fares—you’ll still get a decent return.
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