At this point, investors have to be getting impatient with Bombardier’s (TSX: BBD.B) management.
It all started back in February, when the company told the market that delivery of its new C Series class of business jets would be delayed until the second half of 2015, a six-month wait compared to its original timeline. Naturally, investors punished the stock, sending it down to a new 52-week low.
Then, a couple of weeks ago, investors got more bad news. Air Canada (TSX: AC.B) was widely rumored to be mulling a purchase of 20 C Series planes to replace its fleet of aging Airbus regional jets. But Air Canada declined, choosing to retrofit its existing planes instead.
Then, the Russian government openly mused about ending a $3.4 billion partnership with Bombardier. The country agreed to order 100 turboprop planes from the company, provided that they were made by Russian workers. Now, in light of the Canadian government taking a hard stand against Russia’s involvement in the Ukraine, Russian officials seem to be getting cold feet about the deal.
And finally, just last week, Bombardier announced it would be delaying all future test flights of its new series of aircraft after experiencing engine problems during an on-the-ground testing. The company has traced the problem to components provided by Pratt and Whitney, which is a division of United Technologies. While the problems seem manageable at this point, investors still sent the shares reeling, fearing another delay in delivery of the company’s new line of jets.
Legitimate questions about management
This all culminated on Monday morning as Royal Bank of Canada downgraded Bombardier’s shares. Analyst Walter Spracklin expressed concerns that not only would this news slow down C Series production, but it could also add significant costs to its development, especially if these engine problems are found to be caused by larger issues. He currently has a $4.00 price target on the company’s shares, about 10% above the current price.
Bombardier’s C Series program has been mired with problems, cost overruns, and delays. Investors are asking legitimate questions about whether management has dropped the ball. Management can have all the vision in the world, but without execution, that vision is essentially meaningless.
Think about this from a customer’s point of view. If I had a billion dollars to throw towards buying new airplanes, at a bare minimum I would at least wait until Bombardier started delivering jets to customers. I would definitely consider competing jets, especially if my expectations included delivery in a relatively short period of time.
The bottom line? Both customers and shareholders have no confidence that management is going to execute. That’s not a good position to be in.
Some positives
It isn’t all bad news for the company. Its rail division continues to deliver solid results.
There’s going to be nice demand for the company’s locomotives and rail cars going forward, too. North American cities have aging mass transit systems that will eventually need to be upgraded. Fast-growing Asian cities are starting to invest in subway lines in an attempt to alleviate congestion problems. As more consumers become environmentally sensitive, they will ride the subway more often.
Even through all this bad news, the company still makes money. Last year it booked a profit of $0.31 per share, putting it at a pretty reasonable 12 times earnings. It continues to spend a lot of money on C Series development, but still has a cash hoard of more than $3 billion, easily enough to get it through the 15 months or so before it starts delivering new jets.
The company’s debt of more than $7 billion is a bit concerning, especially if it continues to delay C Series deliveries. But the majority of it is longer-term in nature, and the company should be on stronger footing when it comes due. And remember, it still earns enough to not only comfortably pay the interest, but also show a net profit. The company is well positioned to weather this temporary storm.
Ultimately, investors have to ask themselves one question: Will Bombardier shrug off these struggles and end up delivering its new C Series planes on time? If you think the answer is yes, the stock is a buy at these levels. If the answer is no, it’s best to avoid it. It’s really that simple.
