Should You Buy Bombardier, Inc. Shares for Just $1?

Bombardier, Inc. (TSX:BBD.B) seems cheap. Is the stock a good buy?

| More on:
The Motley Fool

After a horrible 2015, Bombardier, Inc. (TSX:BBD.B) shares have had a rough start to 2016 and now trade at about $1. So with the stock this beat up, has the company finally become a good buy?

Breaking down the numbers

With a share price of $1, Bombardier’s market capitalization would be roughly US$1.4 billion. After adding on US$4.3 billion in net debt (this number factors in the cash injections from public sources), and another US$2.4 billion in pension liabilities, the company’s businesses are valued at roughly US$8 billion.

So what do you get for US$8 billion? Well to start, the government of Quebec recently invested US$1 billion for a 49.5% stake in the CSeries program. And the province’s largest pension fund invested US$1.5 billion for a 30% stake in Bombardier Transportation. When using those valuations, Bombardier’s stake in the two businesses is worth a combined US$4.5 billion.

That leaves Bombardier’s remaining businesses, which includes the sale of regional aircraft, business aircraft, and engineering systems. Combined, they have generated just over US$10 billion in revenue over the previous 12 months. Based on the math above, you’d have to pay just US$3.5 billion for them.

One-third of revenue seems like a very attractive multiple. After all, if Bombardier is able to generate 5% profit margins on these businesses, you’d be paying less than seven times earnings.

Is this deal too good to pass up?

This may seem like a great deal on the surface, but there’s a reason why Bombardier trades this cheaply.

First of all, let’s remember that Bombardier remains in terrible financial shape, even after raising US$2.5 billion from public sources. The company continues to burn cash, and if there are any more slip ups it will need to raise more capital. Remember, Bombardier reportedly has already asked the federal government for an investment. This would not have been done if the company was on solid footing.

Secondly, the numbers above assume that the CSeries program is still worth US$2 billion. But this is based on an investment by Quebec that most pundits see as government assistance.

If that weren’t enough, the business jet industry is in terrible shape. Demand is collapsing in China as its economy slows and the government cracks down on corruption. Russian demand is also falling due to economic concerns and a weak currency. Bombardier’s regional jet business isn’t doing much better, having logged a 0.5 book-to-bill ratio through the first nine months of 2015.

Just stay away

Bombardier’s stock certainly seems cheap, and it can be tempting to bet on a turnaround. But there are simply too many issues with this company, and the potential rewards do not justify the risk. Your best bet is to look elsewhere.

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 Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

Canadian flag

1 Magnificent Canadian Stock Down 4 Percent to Buy and Hold Forever

Here's one magnificent Canadian stock long-term investors may want to add, despite the company being near its all-time high.

Read more »

four people hold happy emoji masks

Why Canadian Investors Should Consider Investing in U.S. Stocks

U.S. lender Oaktree Specialty Lending (NASDAQ:OCSL) has an even higher yield than Toronto-Dominion Bank (TSX:TD).

Read more »

consider the options
Dividend Stocks

Is TD Bank the Best Dividend Stock for You?

Toronto-Dominion Bank (TSX:TD) has a high dividend yield but is embroiled in a serious money-laundering scandal.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

How to Use Your TFSA to Earn $6,000 Per Year in Passive Income

Hint: You'll need this Hamilton covered call ETF, which yields over 10%.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, June 21

Overnight weakness in metals prices could pressure TSX mining stocks at the open today.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.

TFSA: 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Here are two TFSA stocks that have excellent capital gains potential as they are leaders in their respective industries.

Read more »

Growth from coins
Dividend Stocks

2 Dividend-Growth Stocks With TSX-Beating Potential That Deserve More Respect

Here are two of the best TSX dividend-growth stocks you can buy today and hold for the next decade.

Read more »

A stock price graph showing declines
Bank Stocks

TD Stock Has Fallen to a Low of $73: Is it Done Dropping?

TD (TSX:TD) is often viewed as a great long-term investment. But given its volatility in recent months, has TD stock…

Read more »