Bombardier Inc. (TSX: BBD.B) is down nearly 10% after hitting a six-month high in late November. With oil prices plummeting and airline margins rocketing higher, you would think the outlook for a plane manufacturer would be bullish going into 2015.
Let’s take a look at the current situation to see how Bombardier is doing.
Bombardier is in the process of restructuring the business to make it more efficient. During the third quarter, Bombardier announced a reorganization plan that will eliminate 2,000 jobs and save $200 million in annual expenses.
The cost savings are desperately needed. Bombardier is burning through a lot of cash as it struggles to get its CSeries project back on track. The company finished the third quarter with cash and cash equivalents of $1.9 billion. The value was $3.4 billion at the end of December 2013. Bombardier also has a $1.4 billion credit facility.
In the quarterly statement, management said the current capital resources and expected cash flow should be sufficient to cover operating costs and dividend payments. The projection is made on the assumption that Bombardier will meet year-end 2015 delivery targets for the CSeries jets.
Some analysts think the company will have a tough time hitting the deadline. If they are right, the cash situation gets a bit scary because Bombardier has $750 million in debt coming due in 2016. If the cash burn continues through next year and Bombardier doesn’t deliver the jets on time, it will have to go to the capital markets to get cash to pay off the debt. That would be bad for shareholders.
The CSeries program is already two years behind schedule and more than $1 billion over budget.
In its Q3 2014 earnings report Bombardier also outlined the rest of its debt maturity profile. In total, the company has more than $6.5 billion in debt coming due in the next 10 years.
Trouble in transport
Bombardier’s transport business has traditionally been very successful and is the main reason the company is able to ride out the difficulties in the aerospace division. A new development in the North American transport industry could be a sign that the transport group is about to face some serious competition.
Bombardier recently lost a bid to supply trains to Boston’s subway system. The winning bid was placed by China CNR Corp., a company that is very keen on breaking into the American market. The $567 million deal gives China CNR its first contract in North America. With many American cities strapped for cash, Bombardier could run into trouble if it continues to be out bid by China CNR.
Should you buy Bombardier?
At this point, everything depends on the ability of the company to meet its CSeries delivery targets. Planes are big-ticket items and airlines generally pay when they take delivery. Given the poor track record of the project, it might be best to wait for the first CSeries plane to go into commercial service before buying the stock.
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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 Andrew Walker has no position in any stocks mentioned.