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

Concept of multiple streams of income
Top TSX Stocks

The Best Stocks to Invest $1,000 in Right Now

Here are some of the best stocks that every investor should own today to generate massive income and strong growth…

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

Trump’s Tariffs Could Hurt Your TFSA – But These 2 Stocks Will Keep it Safe

Worried about tariffs coming down? Then consider these two stocks to keep your portfolio safe.

Read more »

concept of real estate evaluation
Dividend Stocks

3 Top Real Estate Sector Stocks for Canadian Investors in 2025 

The Canadian real estate sector could see modest growth in 2025, but its long-term secular demand remains intact.

Read more »

Dividend Stocks

Buy These 3 Canadian Stocks Before Tariffs Change the Game

These three dividend stocks offer security, growth -- you name it. No matter what tariffs come our way.

Read more »

Senior uses a laptop computer
Retirement

Top TSX Retiree-Friendly Stocks to Own in 2025

Amidst the volatility around Trump tariffs, these three retiree-friendly TSX stocks can provide stable income and resilient growth.

Read more »

data analyze research
Dividend Stocks

This 7.6% Dividend Stock Is a Must-Buy as Trump’s Tariffs Hit Canada

If there's one way to add some consistency to your portfolio, it's an investment in a passive-income powerhouse like this…

Read more »

protect, safe, trust
Dividend Stocks

Trump’s Tariffs Could Cause a Recession: This 1 Canadian Stock Can Protect Your Portfolio

If you're looking for security, consider the essentials during this period of volatility in the markets.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Stocks for Beginners

The Best Canadian Stocks to Buy and Hold Forever in a TFSA

Are you wondering what types of investments to hold in a TFSA? Take a look at these types of companies…

Read more »