Bombardier Shareholders Got Bombed

Bombardier shares fell sharply on the back of a disappointing earnings release. Might this slide represent an opportunity?

| More on:
The Motley Fool

The S&P/TSX Composite closed lower for the second (gasp!) day in a row on Thursday.  One of the leading causes of today’s decline, checking in with a 9% slide, was Bombardier (TSX:BBD.B).

As is so often the case, the financial press and sell side analysts have keyed on income statement related metrics to justify today’s sharp decline.  The income statement however is a very poor indicator of this company’s performance due to the nature of the business.  Multi-period projects that involve bringing a sizeable backlog to life is what Bombardier does, and this model does not fit well with income statement accounting.  Predicting what this company is going to “earn” in any one quarter is at best a wild guess.

To cut through the noise and gain a better handle on Bomber’s condition, use the other two financial statements – namely, the balance sheet and statement of cash flows.

Balance Sheet

In the spirit of cutting through the noise, we’ll focus on one balance sheet related metric.  Total Debt.  We begin with long-term debt.  At the end of 2012, this amounted to $5.4 billion.

Let’s now consider “other liabilities” such as Government refundable advances – these “others” amount to $1 billion.  That’s $6.4 billion total if you’re keeping track at home.

Last on our list is the pension deficit, calculated by subtracting the fair value of plan assets from the present value of the defined benefit obligation.  This sits a snick under $3 billion.

$9.4 billion of Total Debt.  Perfectly acceptable if you’re Apple and carry Shareholder’s Equity of $127 billion.  Perfectly unacceptable if you’re Bombardier and carry Shareholder’s Equity of $1.4 billion.

Yes, the company has $2.9 billion of cash sitting on the balance sheet, but still, if the financial wind blows in the wrong direction, the good ship Bomber is going to heel.

Cash Flow Statement

Accentuating the financial risk that Bomber presents is the company’s cash flow statement.  One of the traits of an investable company is a proven ability to consistently generate free cash flow.  Bombardier “generated” -$792 million of free cash flow in 2012, which was a significant improvement over the -$1,257 million that was “produced” in 2011.  A small sample size, but not numbers that are typical of a quality company.

The Foolish Bottom Line

Even if we ignore the financial risk and lack of free cash flow, Bombardier is a company that I would consider “too hard” to invest in.  The financial statements and accompanying notes are enough to make the head of a casual observer spin.  Greener pastures exist.

Bombardier shares were $5 each 10 years ago (closed at $3.89 today) and very well could be at a similar level 10 years from now.  Given the fickle nature of its order driven business, sustained momentum is tough to come by for this company and the fact that it is carrying the huge albatross of financial risk does not help.  In my opinion, rolling the dice on Bombardier is a risky move with a non-apparent return.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  David Gardner owns shares of Apple.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

FREIGHT TRAIN
Investing

CNR Stock: Should You Buy Today?

Canadian National Railway has been hit in recent quarters, as economic growth has slowed, with CNR stock declining 10% in…

Read more »

Family relationship with bond and care
Dividend Stocks

TFSA Investors: 3 Cheap Canadian Stocks for Retirees

These three Canadian stocks are super cheap for retirees looking for a great buy that will last the test of…

Read more »

calculate and analyze stock
Dividend Stocks

CPP Disability Benefits: Here’s How Much You Could Get

Not everybody can get CPP disability benefits. If you want some passive income, consider investing in Royal Bank of Canada…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Boosting Your Monthly Income: TSX Stocks That Deliver

Dividend investing can boost regular or active incomes, especially select TSX stocks that pay monthly dividends.

Read more »

consider the options
Tech Stocks

Better Buy (2024 Edition): Shopify or Nvidia Stock?

Shopify (TSX:SHOP) isn't the only red-hot tech stock in town that could add to recent gains.

Read more »

Bad apple with good apples
Investing

5 Stocks You Can Confidently Invest $500 in Right Now

These stocks could significantly grow your investment over the next decade.

Read more »

Illustration of bull and bear
Tech Stocks

A Bull Market Is Coming: 3 Growth Stocks That Could Thrive

Given their high growth prospects and cheaper valuation, these three growth stocks would be an excellent buy as the market…

Read more »

Golden crown on a red velvet background
Energy Stocks

Enbridge Stock: This Dividend Aristocrat Could Gain in 2024

Enbridge (TSX:ENB) stock is looking like a great buy as management expects it to grow in 2024.

Read more »