Bombardier Inc. (TSX:BBD.B) is in the news a lot these days and very little of the coverage is good for shareholders. The company’s ongoing struggle with its CSeries jet program is putting the rest of the company’s operations at risk. As problems with the new jets persist, customers are getting impatient and investors are wondering if the shares of this once-great Canadian company will ever fly high again.
Here are four simple reasons why I think investors should avoid Bombardier Inc.
1. Lost credibility
Support from both institutional and retail investors requires faith that a company will deliver on its promises. Bombardier continues to disappoint the market with delays in the delivery of its CSeries jets. The project is already two years late and $1 billion over budget. The worst part of the situation is that investors have no idea if Bombardier will meet its revised targets.
The company says it will be able to deliver the CS100 to clients by the end of 2015 and the CS300 will be available in 2016.
Many analysts are skeptical that the company can meet the deadlines and there is a risk that clients could start canceling orders. Bombardier says it has 513 commitments or letters of intent to purchase the CSeries jets, including 203 firm orders.
As the clock keeps ticking, customers are being forced to adjust their business plans to accomodate Bombardier’s delays.
If the test flights were near completion, the delays would be more palpable, but Bombardier has completed less than 20% of 2,400 hours of required flight trials. This leaves a lot of room for more disappointment. The rest of the trials might fly along without a hitch, but the track record to date suggests otherwise.
2. Financial risks
Besides upsetting its clients, Bombardier runs the risk of facing a cash flow crisis if it takes too long to get the planes ready for service.
The way the airline industry works is that most customers pay for the planes when they take delivery. If Bombardier doesn’t get the planes to its customers by the end of 2015, it could be forced to raise capital to cover debt obligations that will roll over in the early part of 2016.
If Bombardier is required to tap the capital markets to alleviate cash flow problems, the stock will lose some serious altitude very quickly.
3. Possible dividend cut?
A dividend cut could be an option if it looks like the CSeries jets won’t be delivered according to the latest projections. It is a reasonable means of preserving cash flow, but the message the company would be sending is that further delays are expected. Again, the stock would nosedive on the news.
Bombardier pays an annualized dividend of $0.10 that yields about 2.8%.
4. Years of waiting and still no gains
Bombardier’s stock price performance is abysmal. The shares are down 23% over the past five years, and down 67% in the past 15 years.
The bottom line
Bombardier has delivered no value to shareholders for years and there is no indication right now that the situation will improve significantly in the near to medium term.
With so many great Canadian companies to choose from, I think investors should avoid Bombardier Inc. and look for better opportunities for both dividend growth and capital appreciation.
