Blue Bird (BLBD): A Tariff-Resilient Play in the School Bus Market

As tariffs and shifting regulatory landscapes roil the transportation sector, Blue Bird (BLBD) stands out as a defensive play with a strategy tailored to navigate headwinds while capitalizing on its niche. The school bus manufacturer's shift toward propane/internal combustion engine (ICE) models, coupled with its robust backlog and pricing discipline, positions it to thrive even as electric vehicle (EV) margin pressures and trade tensions loom. Here's why investors should take note—and a cautionary glance at risks lurking in the supply chain.

The Propane Pivot: Margin Strength in a Volatile Market

Blue Bird's Q1 2025 results underscore a deliberate strategy: prioritizing its propane-powered ICE buses, which now account for 51% of sales, compared to competitors' paltry 10-15% ICE mix. This focus isn't just about market share—it's about profitability. Propane buses carry an adjusted EBITDA margin of 15%, a stark contrast to the EV segment's thinner margins. The company's propane dominance stems from its exclusive offerings, which school districts increasingly favor for their lower total cost of ownership (TCO) compared to diesel or EVs.

This product diversification is critical in an era where EV adoption faces headwinds. While Blue Bird aims to sell 1,000 EVs in 2025—a 42% increase from 2024—it has tempered expectations by delaying production of 25% of its EV backlog until funding uncertainties resolve. The company's pragmatic approach—prioritizing fully funded EV orders and adjusting prices—reflects a strategy to protect margins. For instance, it slashed EV lease prices by $25,000 to improve TCO parity with ICE buses, while hiking non-EV prices by 5% to offset tariff costs.

Backlog Strength and EPA Funding Tailwinds

Blue Bird's 4,400-unit backlog—equivalent to six months of production—includes 1,000 EVs, a record for the company. This pipeline is underpinned by federal funding, particularly the EPA's Clean School Bus Program, which had paused disbursements but recently resumed. State and local subsidies further bolster demand, with many districts relying on grants to transition to cleaner vehicles.

The backlog's health is reflected in Q1's $314 million revenue and a $200 million EBITDA midpoint guidance for 2025, up 9% from 2024. Even as EV production faces delays, the propane segment's stability ensures cash flow remains robust.

Tariff Risks: A Cloud, but Not an Overcast

The elephant in the room is tariffs. U.S. levies on Canadian and Mexican imports, including key components for EVs, remain in place, raising production costs. Blue Bird has mitigated this by:
- Shifting toward domestically sourced suppliers (though progress is slow).
- Raising non-EV prices to offset tariffs.
- Focusing on high-margin propane sales.

However, prolonged tariffs could force further price hikes or margin compression.

Valuation: Undervalued Relative to Peers

At a P/E of 13.87 and an EV/EBITDA of 8.4, Blue Bird trades at a discount to peers like Shyft Group (EV/EBITDA 18.08) and Federal Signal (17.91). Analysts' consensus price target of $61.43—a 48% premium to its current $41.50 share price—hints at upside potential. Morningstar's $39.25 “fair value” estimate also suggests the stock is undervalued, though its 290% premium to fair value as of June 11 may reflect short-term volatility.

The Bottom Line: A Buy for Defensive Investors

Blue Bird's combination of a propane-driven cash engine, EPA-backed backlog, and pricing discipline makes it a compelling play in a sector rife with uncertainty. While tariffs pose a risk, the company's mitigation strategies and the school bus market's inelastic demand—critical for communities—bolster its defensive profile.

Investment Thesis:
- Buy: For investors seeking stability in a volatile EV space. Target $55–$60, with upside if tariffs ease.
- Hold: If you prioritize high growth over steady returns.
- Avoid: Only if you believe school districts will sharply reduce bus purchases or tariffs escalate further.

Historical performance further supports this thesis. A backtest of buying Blue Bird on the announcement date of quarterly earnings releases and holding for 20 trading days from 2020 to 2025 yielded an impressive 198.55% return, though with significant risk. The strategy's high volatility (36.46%) and maximum drawdown of -43.08% highlight its potential for sharp declines, while the Sharpe ratio of 0.63 suggests moderate risk-adjusted returns. This underscores the importance of risk tolerance when considering BLBD as a defensive holding.

Blue Bird isn't a high-growth juggernaut, but in a market where margins and execution matter most, it's a reliable hand to hold.