Last week, Bombardier Inc. (TSX: BBD.B) announced that Braathens Aviation AB, a Swedish airline, was delaying its $665 million order for 10 of Bombardier’s new CSeries aircraft. Braathens was scheduled to be the first airline to take delivery of the troubled series of jets and also has an option to acquire an additional 10 CSeries jets, which seems less likely to be exercised.
This is just the latest in a series of missteps, expensive mistakes, and delays that have plagued the development of the CSeries line. The company announced earlier in the year that the first deliveries of the new planes would be pushed back from early 2015 to late in the year. And in May one of its test planes had engine problems, causing all testing to halt. Tests are scheduled to resume later this month, but that delay could cause the company to push back deliveries once again.
In short, it’s been a brutal 2014 for Bombardier investors.
The performance of the company’s shares has mirrored all the bad news. Since peaking at over $5 apiece in late 2013, shares have been on a steady spiral downwards, settling in at $3.65 today, close to a 52-week low.
It seems counterintuitive, but this is a terrific opportunity for long-term investors. In fact, I think investors who buy now and hold their shares for five years will see their investment double. Here are three reasons why.
1. The hard work is already done
Since first announcing the CSeries project back in 2005 until February of this year, Bombardier has spent a total of $4.4 billion on developing its new line of airplanes. Sure, the project has been poorly run, but it’s still almost completed. We’re in the homestretch of CSeries development.
So who cares if the company has to announce yet another delay in deliveries, as a Goldman Sachs analyst suggested is all but inevitable. In five years the company will be working on getting its way through the massive backlog of orders already committed. Let the short-term thinkers push the share price down while the long-term investors patiently wait for better times.
2. Order backlog
Between the CS100 and the CS300 models, which retail for $62 million and $71 million, and carry 110 and 135 passengers, respectively, Bombardier has firm orders for more than 200 jets on its books, with options for more than 150 more. Based on just half the options being exercised the company has a backlog of more than $18 billion worth of planes to be built over the next five or six years.
And that’s without including a single new order or the company’s rail division, which continues to perform well even as investors have seemingly forgotten it exists. Rail is the main reason the company has been able to remain profitable during the CSeries debacle. You could call it Bombardier’s hidden gem.
3. Balance sheet strength
Even if the company is forced to push back CSeries deliveries until the first part of 2016, it has sufficient capital to weather the storm.
The company currently owes more than $7.7 billion in long-term debt, but that’s partially offset by more than $3 billion in cash. Yes, it is cash flow negative, but that’s only because it’s pouring so many resources into CSeries development. The company just needs the cash to hold out until it starts deliveries. Plus, as the unveil date becomes closer, the amount of cash the division will command will start to ease up.
Bombardier is beaten up because investors don’t like the uncertainty surrounding CSeries. Investors with a buy and hold approach could do very well here, as long as they’re patient. Bombardier is truly unloved, which, ironically, makes it a great buy.
