Bombardier, Inc. (TSX: BBD.B) has nearly doubled off the January low, and investors are wondering if more government bailout money will drive the shares higher.
Let’s take a look at the big picture to see if Bombardier should be one of your holdings.
Quick fix
Bombardier received a significant cash injection in late 2015 from both the Québec government and the province’s pension fund. Québec handed over US$1 billion for a 49.5% stake in the beleaguered CSeries program, and the Caisse de dépôt et placement du Québec ponied up US$1.5 billion to take a 30% ownership position in Bombardier Transport, the company’s rail division.
After the announcements, the stock received a nice boost, but the party didn’t last very long as it became evident the money was just a bandage on a cut that doesn’t want to heal.
Things continued to deteriorate until the stock plunged below $1 per share in January when investors pretty much decided bankruptcy was in the cards regardless of how much cash the government was willing to throw at the business.
New hope
Since then, the shares have staged a rather impressive comeback. The surprise rally began when Air Canada announced it has signed a letter of intent to purchase 45 CSeries jets.
This was certainly welcome news considering the company had not received a new order since September 2014.
Getting a major carrier to step up to the plate has been difficult for Bombardier. The CSeries jets are marketed on their fuel efficiency, which was a big selling point back when oil was US$100 per barrel. Unfortunately, the drop in fuel prices has taken away much of the cost advantage, and many airlines are simply opting to lease or buy older models at lower prices.
Had Bombardier been able to meet its targets on the CSeries, it might have been able to secure the 300 orders it hoped to achieve before the plane goes into commercial service. Unfortunately, the program is more than two years behind schedule and at least $2 billion over budget.
Some pundits say the company simply missed its window of opportunity.
More turbulence
Shortly after the Air Canada announcement, one of Bombardier’s early CSeries customers, Republic Airways, filed for bankruptcy. The company’s order for 40 planes was already on thin ice before the announcement, and some analysts now believe the deal will be cancelled. If they are right, the Air Canada order, which still isn’t firm, would simply replace the planes ordered by Republic back in 2010.
As a result, the situation isn’t much different than it was in January, but the stock is more than 90% higher.
Prime Minister Trudeau to the rescue
Much of the recent gains in the stock can be attributed to the expectation that the federal government is going to kick in another US$1 billion to help Bombardier get through the next few years.
Does it need the additional funds?
The company doesn’t expect to start making money on the CSeries until at least 2020 and that’s assuming everything goes according to plan from here on out, so there is reason to believe the funds will be needed. With thousands of Canadian jobs at stake, the government can’t afford to take a wait-and-see approach to lend a helping hand.
At the moment, the existing cash injections are certainly giving Bombardier a chance to see the CSeries project through to the end, and the expectation of more aid has put a temporary floor under the stock, which has been good for investors in the short term.
Should investors hop on for a ride?
Bombardier might be a case of “buy the rumour, sell the news.”
The government is fully expected to give Bombardier the money. When the announcement comes, the stock might initially take off, but investors should be careful about betting on a sustained rally.
The company is still sitting on nearly $9 billion in debt, firm orders for the CSeries are few and far between, and the rail division is facing some unprecedented headwinds that the market is completely ignoring.
Government aid might be good for saving jobs, but I’m not convinced it will help shareholders much in the medium term. As such, it might be wise to look for other opportunities to invest your savings.
