Municipalities and state governments are typically frugal when it comes to capital expenditures, as both have to work with shoestring budgets funded by tax dollars. 

As a result, equipment and other hardware are stretched as far as possible. Said another way, the replacement cycle in the public sector is based on minimizing costs and maximizing utility and qualities like safety and security.

While expenditures on hardware or textbooks can be delayed over and over again, the same cannot be said for school buses—safety is a top priority since these are used to transport children to and from school. Older models also don’t have the same safety standards as newer ones.

With half of the buses in the current U.S. school bus fleet over 10 years old, a wave of replacements is likely.

Blue Bird (BLBD), one of the three major school bus makers, and the only pure-play publicly traded company, offers potential upside for investors who want to capitalize on the upcoming replacement cycle for school buses.

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Municipalities and state governments often take a cost-efficient and frugal stance when it comes to capital expenditures, due to the fact that they have to work with shoestring budgets funded by tax dollars and subjected to federal allocations and tax-and-spend legislation at the federal and state levels.

As a result, the procurement and replacement cycles in the public sector often revolve around minimizing costs while maximizing utility.

This could mean using older iterations of hardware and software or keeping generations-old textbooks in circulation instead of using newer ones. 

While the procurement of newer textbooks, hardware, and software can sometimes be delayed over and over, school buses are a different story entirely.

School buses transport children to and from schools on a daily basis, making safety a top priority. Older models don’t share the same safety standards as newer models so there’s almost no incentive to delay procurement of up-to-date models.

There’s also fuel costs to consider. Older buses will run on older, less efficient engines that run on diesel—a fuel source that’s much more expensive than petrol, propane, or hybrid alternatives. Due to these factors, older models will lead to much higher cost overruns throughout their operating lifespan, making replacement much more cost-effective long-term.

Most states set 15 years as the replacement target age for their respective bus fleets. And according to recent estimates, the average school bus age is 11 years, with half the current fleet being 10 years or older, which means many buses are near the end of their operating lifespan.

Due to these factors, school bus manufacturers are set to see an increase in school bus replacements as state and municipal governments look towards replacing their aging fleets.

This is where Blue Bird Corporation (BLBD) comes in.

It is one of the three major school bus makers that collectively make up 95% of the market, which is fairly evenly split between them.

Blue Bird’s peers, Thomas Built and IC Bus are owned by Mercedes and Volkswagen, respectively, positioning Blue Bird as the only pure-play option for investors.

With an aging fleet of buses and municipal budgets gearing towards replacement, the entire industry could see tailwinds due to mid-to-high single digit growth in bus sales.

Aside from being a pure-play bus maker, Blue Bird possesses another competitive advantage: It’s the clear leader in non-diesel options.

While only 10%-20% of its competitors’ sales are non-diesel, more than 60% of Blue Bird sales are tied to more cost-effective power such as natural gas, propane, and electricity.

In all, the company has a fleet of more than 20,000 of these buses in operation at present.

Another factor to consider is the growth of electric buses.

Electric school buses are seeing widespread adoption in the U.S. Between 2020 and 2025, the number of electrically-powered school buses has risen from 415 to over 5,100, transporting more than 265,000 students as opposed to just 21,000 five years ago.

This adoption has been fueled by the demand for more environmentally- and fuel-friendly power sources.

As local governments look to upgrade their aging bus fleets, Blue Bird is well-positioned for the next investment cycle.

Not only has Blue Bird positioned itself to benefit from long-run municipal spending tailwinds, but a decades-long transformation away from diesel buses has provided a significant step up in its profitability. 

In 2014, only 17% of its buses were non-diesel, but over the decade that followed, it has slowly transitioned away from diesel buses, leading to further market differentiation and an increase in its profitability. Not only that, it’s also positioned itself to benefit from municipal government spending tailwinds.

The company has leveraged a strong reinvestment cycle following the pandemic to achieve a 45% Uniform ROA and high single digit asset growth.

Yet despite this, Blue Bird only trades at a low Uniform P/E of 10x. At this level, the market expects Blue Bird’s Uniform ROA to decline to just 27% in the coming years. This low valuation indicates that the market is still understating the potential benefits of shifting away from diesel and the upcoming bus replacement cycle.

With high profitability, concrete growth opportunities, and muted valuations, Blue Bird could present an interesting opportunity for investors as it continues to perform.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research