Yesterday was not a good day to be a Bombardier Inc. (TSX:BBD.B) shareholder.
According to Bloomberg, the stock’s 26% drop was the company’s worst one-day performance since 1998. Shares got crushed on several pieces of bad news, including profit and cash flow results that didn’t meet expectations, a pre-tax write-off of $1.4 billion in the company’s fourth-quarter results, and the big shoe to drop, the announcement that it would be laying off 1,000 workers in Kansas and Mexico as it paused its Learjet 85 program.
Although not quite as well known as its CSeries project, the company’s Learjet 85 program is important for a few reasons. It represented an inroad into the medium-sized jet market, which the company had previous identified as an potential opportunity. Like the CSeries, it has been plagued with delays, originally scheduled to go into service during 2013 when it was announced in 2007. Even if the company would have kept at it, it’s likely the Learjet 85 program wouldn’t be looking at making deliveries to customers until about 2018.
That’s a long delay.
But the big concern is that by pausing this program, the company risks running out of money. According to Joseph Nadol of JP Morgan, “liquidity is now the key issue for the stock. Cash still seems likely to move well below the required level unless the company raises fresh capital.” Essentially, the company is cutting all the costs it can to ensure it has enough money to get the CSeries line of jets to market.
This could also be a predictor to a delay in the CSeries project, which has already suffered from its share of issues over the years. Although the company reiterated that the first CSeries planes are on schedule to be delivered to customers during the second half of 2015, it’s obvious that the market doesn’t share management’s enthusiasm. And if there’s yet another delay, Bombardier might run out of money. Management has all but admitted it.
Before this announcement, I was bullish on Bombardier. I knew that the company had a lot of debt, but it also has orders for 243 CSeries aircraft with options for 162 more. If you add in the company’s other orders, it’s currently sitting on a backlog of more than $50 billion. There’s value in that, and the fact is that a company like Bombardier will have to take on a lot of debt while bringing out new products. That’s just the way it works.
Plus, the company has other things going for it, like the weakening Canadian dollar, which looks to be a pretty major tailwind. And yet, it’s still reporting results that disappoint investors. At what point will Bombardier finally get it together?
Creditor protection is a very real possibility for the stock if the CSeries program is delayed again. The company is sitting on $2.4 billion worth of cash with access to an additional $1.4 billion worth of undrawn credit, but it’s still burning cash quickly. For the first three quarters of 2014, the company burned through $1.5 billion worth of cash and borrowed an additional $700 million to bolster its balance sheet. When you’re burning cash that fast, billions worth of liquidity can be gone pretty quickly.
It almost makes sense for the company to enter bankruptcy protection. Much of its debt would be converted to equity (while all but wiping out current shareholders), making it a much leaner company for when CSeries finally comes to market. Less debt would translate to more profits as well as flexibility to pursue new projects.
If Bombardier can make it through 2015 without needing to raise capital and if it actually meets a deadline and starts delivering CSeries jets when it promised, it could be a huge winner. Ultimately though, there’s a whole lot of risk involved here. Investors beware — an investment in Bombardier has the risk of going to zero.
