Blue Bird's Margin Expansion and Capacity Growth in FY2026: Is the Stock Undervalued Amid Policy Risks?

Blue Bird Corporation (BLBD) has long been a focal point for investors seeking exposure to the pupil transportation sector, particularly as the company navigates the transition to electric vehicles (EVs). With FY2026 guidance reaffirmed at $1.5 billion in revenue and gross margins expanding to 21.1%-a 4.1-point increase from FY2024-the company appears to be executing its strategic priorities effectively. However, the question remains: Is Blue Bird's stock undervalued despite tougher comparisons and policy risks? This analysis examines the interplay of financial performance, capacity growth, and regulatory uncertainties to assess the stock's valuation.

Financial Performance and Margin Expansion

Blue Bird's FY2025 results laid a strong foundation for FY2026. In Q4 2025, the company reported sales of $409.37 million and net income of $36.5 million, both showing year-over-year improvements according to financial reports. Gross margin expansion has been a standout, driven by cost management and pricing actions that offset variable cost pressures. Analysts like DA Davidson and BTIG have upgraded their FY2026 earnings per share (EPS) estimates, with DA Davidson forecasting $4.22 per share. This optimism is reflected in the company's fair value estimate of $63.75, which exceeds the current stock price.

The company's ability to maintain margin neutrality despite tariffs and component cost fluctuations further underscores its operational discipline. For instance, Blue Bird's management highlighted a robust backlog of nearly 4,000 units, including over 850 electric vehicles (EVs), which provides visibility into future revenue streams. This backlog, combined with strategic investments, in automation and material movement systems, positions Blue Bird to scale production efficiently as demand grows.

Capacity Growth and Strategic Investments

Blue Bird's FY2026 guidance includes plans to expand manufacturing capacity, including a new factory equipped with automation to support forecasted volume increases. While the company did not disclose specific capacity utilization rates, its commitment to diversifying its product portfolio-such as the 100 commercial chassis units planned for FY2026-signals a proactive approach to market expansion. These initiatives are expected to drive both revenue and EBITDA growth, aligning with long-term margin targets.

The company's $80 million investment in converting a former diesel motorhome facility into an electric and low-emission vehicle manufacturing site is another critical lever according to company announcements. This facility, expected to create over 400 jobs, underscores Blue Bird's pivot toward electrification and its alignment with federal programs like the EPA Clean School Bus Program (CSB Program). However, the CSB Program's recent funding freeze-$1 billion in reimbursements paused due to administrative disputes-has introduced uncertainty. Blue Bird has had to reprioritize production to focus on fully funded orders, reducing its FY2026 electric school bus (ESB) delivery forecast from 1,300 to 1,000 units.

Valuation Metrics and Undervaluation Claims

As of November 2025, Blue Bird's P/E ratio stands at 13.60, while its PEG ratio varies between 0.97 and 1.57 across different analyses according to financial reports. These metrics suggest the stock is trading at a discount relative to its earnings growth and industry peers. For context, the Automotive - Domestic industry's average PEG ratio is 2.68 to 4.18, indicating that Blue Bird is undervalued when compared to sector benchmarks.

The fair value estimate of $63.75 also implies upside potential, particularly as the company's long-term earnings expectations improve. Analysts have noted that Blue Bird's leadership in the ESB segment-driven by its 98% share of CSB Program funds allocated for EVs-positions it to benefit from ongoing EPA and Inflation Reduction Act (IRA) funding. However, the risk of regulatory changes or funding delays could dampen growth if federal support for electrification wanes.

Policy Risks and Long-Term Outlook

The CSB Program's $5 billion authorization over five years (FY2022–2026) remains a cornerstone of Blue Bird's growth strategy. Yet, the freeze on $1 billion in reimbursements has created immediate headwinds, forcing the company to delay unfunded orders. While the health and climate benefits of ESBs are well-documented-projected to generate $1.6 billion in annual societal savings according to industry analysis-sustained policy support is critical to maintaining demand.

Blue Bird's management has acknowledged these risks, emphasizing that the company's margin expansion and capacity investments are designed to withstand short-term volatility. The company's ability to absorb component cost increases via pricing actions according to earnings commentary and its focus on high-margin ESBs further insulates it from some of the sector's traditional challenges.

Conclusion

Blue Bird's FY2026 outlook is underpinned by strong margin expansion, strategic capacity growth, and a robust backlog of orders. While policy risks-particularly around CSB Program funding-pose near-term uncertainties, the company's operational discipline and leadership in the ESB market suggest it is well-positioned to navigate these challenges. With a P/E ratio below industry averages and a fair value estimate above current levels, the stock appears undervalued despite tougher comparisons. Investors who can stomach regulatory headwinds may find Blue Bird's long-term growth story compelling, particularly as electrification trends gain momentum.