Is It Time to Buy Bombardier?

Bombardier is trading near 52-week lows. Is now a good entry point?

| More on:
The Motley Fool

In January, shares of Bombardier (TSX: BBD.B) fell approximately 8% on news that production of the eagerly awaited C-Series aircraft would be delayed. The company had indicated investors could expect to see C-Series jets in the sky by the end of 2014, but it pushed back production forecasts to mid-2015. And that’s just for the smaller CS100 Series. The larger CS300 Series isn’t expected to be delivered to customers until six months after the CS100.

A month later, Bombardier announced weaker than expected Q4 earnings, and further indicated 2014 would be a struggle. The company has been struggling to hit 8% margins, up from the current 5-6% range. Management indicated that 8% margins weren’t going to happen any time soon, which sent the share price down another 10%.

The lilver lining

Fortunately for the company, this news isn’t as bad as it first seems. Both Boeing (NYSE:BA) and Airbus are also dealing with delays on their new aircraft programs, the 787 Dreamliner and the A380. It’s not such a big deal to be late coming to market when all your competitors are too.

In fact, not only did Bombardier come out of the C-Series delay announcement with its entire order book intact, but a Saudi airline recommitted an order for 16 of the larger CS300 aircraft, with an option to buy 12 more. The total contract could be worth $2 billion, assuming the option is exercised. The firm’s customers are disappointed with the delays, but not one has cancelled an order.

Yes, the delay will cost the company more in research and development going forward — analyst estimates are at about $500 million — but that’s a small price to pay for a series of planes that’s expected to be in production for 20 years. This short-term pain could be a good entry point for investors looking at the long term.

While waiting for the aircraft division to get its act together, Bombardier investors still get to own a rail car division that’s a market leader, and has margins 30% higher than the aircraft division (6.5% EBIT margins compared to 5.0%). Demand looks good for the rail business, as cities around the world are looking to invest in public transit to help cut down on both traffic congestion and greenhouse gas emissions.

Strong balance sheet

Bombardier has a solid cash position of $4 billion after its latest round of financing.  Yes, it’s also holding some significant debt — to the tune of $7 billion — but both the high cash balance and the almost $65 billion order backlog minimizes the long-term debt risk going forward.  The company is also profitable, as 2013 ended up 31 cents in the black. Analysts are estimating the company will earn 39 cents per share in 2014, even after the company’s Q1 guidance was disappointing.

While investors should always be concerned with debt and other obligations going forward, Bombardier should easily have enough to get it through this transition period. Earnings should improve once it starts delivering C-Series jets, and research and development expenses will go down sharply too. The issue is believing the company’s revised timeline for the C-Series. This uncertainty is what’s weighing down the stock.

Foolish bottom line

Patience could pay off for investors if they buy the stock now and the company manages to deliver on its promises. If you’re a believer, now is a terrific entry point.

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.

Fool contributor Nelson Smith has no position in any stocks mentioned in this article. 

More on Investing

Retirement plan
Dividend Stocks

Planning for Retirement? Here Are the Best Canadian Dividend Stocks to Buy

Buying two of the best Canadian dividend stocks now for the long term can help you retire without financial worries.

Read more »

investment research
Dividend Stocks

A Dividend Giant I’d Buy Over TD Bank Stock

Energy and financials are the TSX’s sector heavyweights, but I’d choose a dividend giant in the former over a big…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

2 Dividend Stocks Worth a Permanent Spot in My TFSA

Restaurant Brands International (TSX:QSR) and Berkshire Hathaway (NYSE:BRK.B) are two of my top TFSA holdings that I intend to hold…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Don’t Avoid Bank Stocks! This 1 Actually Has Massive Long-Term Potential

Some investors have said that it's a good time to avoid bank stocks. Here's one bank you shouldn't avoid. Buy…

Read more »

edit Businessman using calculator next to laptop

5 Stocks You Can Confidently Invest $500 in Right Now

Buy and hold stocks these TSX stocks to outperform the broader market averages in the long term.

Read more »

Increasing yield
Dividend Stocks

3 Canadian Dividend Stocks Offering High Yields and Reliable Income

These valuable dividend stocks offer solid deals right now, with ultra-high yields that will certainly last well beyond this downturn.

Read more »

dividends grow over time
Stocks for Beginners

Passive Income: How I Got to $2,000/Year After Just 4 Years of Saving

I got to $2,000/year in passive income partially by buying bank stocks like Toronto-Dominion Bank (TSX:TD).

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

Best of Both Worlds: 3 Growth Stocks That Also Pay Dividends

Dividend stocks are great until a downturn ends. But luckily, these three dividend stocks also offer a massive amount of…

Read more »