Barrick Gold Corporation (TSX:ABX)(NYSE:ABX) and Bombardier Inc. (TSX:BBD.B) have disappointed investors for more than a decade, but the two Canadian icons find themselves at pivotal points right now, and investors are wondering if it’s finally time to kick the tires again on these stocks.
Let’s take a look to see if either Barrick or Bombardier deserves a spot in your portfolio.
Barrick Gold Corporation
Big egos, bad acquisitions, ballooning debt, and brutal gold prices have combined to send Barrick’s shares on a nasty, prolonged slide. In fact, the stock is down 66% in the past three years and now trades near its lowest point in more than two decades.
Investors could be forgiven for avoiding the stock at all costs, but recent moves by the company suggest that better times could be ahead.
New management is culling head office staff by 50%, selling non-core assets, and planning to reduce debt by US$3 billion by year-end.
Barrick is also promising to focus more on the interests of its shareholders. I know, it’s tough to believe, but the company recently said it intends to evaluate all new investment opportunities against a targeted return on capital of 15%. If an opportunity doesn’t meet the grade, cash could be returned to shareholders as dividends and share buybacks.
This is a very different approach than the “bigger at all costs” strategy that the company pursued in recent years.
Barrick is doing a decent job of reducing operating expense. The move toward a lean, decentralized operating model helped the company report all-in sustaining costs of US$864 per ounce for 2014.
At current gold prices, Barrick expects to generate positive free cash flow in 2015.
Barrick still has US$13 billion in debt. If the company can manage to clean up the balance sheet in a way that doesn’t annihilate investors in the process, the stock could see a nice recovery in the next two years.
Bombardier is at a critical moment in its history. The company just announced a new CEO, cut its dividend, and raised more than $1 billion in equity through a surprisingly successful bought deal.
The company also sold US$2.25 billion of senior notes and aims to raise US$750 million for a term of 3.5 years at a coupon of 5.5%. Those funds will probably be used to redeem a 4.25% note that is due in January next year.
The remaining $US1.5 billion is for a 10-year term at 7.5%.
The success of the equity issue is a double-edged sword for existing investors because it is extremely dilutive. The debt offering is also punitive, but it buys the company some critical time.
Bombardier is in trouble because its new CSeries jet program is two years behind schedule and $2 billion over budget. The stock is down more than 40% in the past three months, and anyone who bought the shares 10 years ago is looking at dead money.
What should investors do?
Barrick and Bombardier are risky bets. Buying Barrick requires a belief that gold prices will move higher in the coming years, and that the company will pay down its debt through asset sales rather than a massive equity issue.
Investing in Bombardier is a bit trickier because the company is paying a very high price to raise capital, and there is no guarantee that it won’t face another cash crunch in the next 12 to 18 months.
Both stocks are contrarian picks. At this point, I think Barrick is a better choice, but it takes some guts to pull the trigger.
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Fool contributor Andrew Walker owns shares of Barrick Gold Corp.