Has Bombardier, Inc. Moved Too Much Too Fast?

Bombardier, Inc. (TSX:BBD.B) shares are up 130% from February lows. Is this just the beginning of a sustained move higher?

| More on:
The Motley Fool

It’s been a good three months for Bombardier, Inc. (TSX:BBD.B).

Shares of the embattled company sank below $1 per share back in February as investors openly speculated the company was on an inevitable road to bankruptcy. The company was also dealing with disappointment that the government of Iran gave a big order to competitors. Shares sank as low as $0.76 each, putting the company in official penny-stock territory.

Since then, it’s been nothing but good news. The company got one big CSeries jet order from Air Canada, and then another from Delta Air Lines. Rumours are now swirling that JetBlue will be the next company to give Bombardier an order. That’s quite the recovery from three months ago, when pundits were criticizing the company for not getting a firm order since late 2014.

With shares of the company hitting $2 each in trading on Wednesday, the rally has been truly amazing. That’s a total return of 130% in just a few months. That’s the kind of result that can really supercharge a portfolio’s return. And most importantly, it raises Bombardier from its status as a company that’s practically bankrupt.

Now that shares have done so well, investors are starting to crowd back into the stock. Is there still upside potential, or have shares moved too quickly?

The bull case

The bull case is quite simple. As long as orders continue to flow in, investors will be bullish on Bombardier shares.

It’s all about keeping workers busy. If orders continue to enter the pipeline, the company will have enough work to keep employees busy for at least a few years. And since deliveries of the new CSeries line are slated to begin in the next one or two quarters, cash will finally start to come into the coffers rather than flowing out.

There’s also a long-term travel boom helping the company out. As the world gets richer, the experience of travel opens up for millions of additional people. There are whole generations of people in places like China and India that can now afford to fly for the first time. This movement should be enough to ensure good demand for planes like the ones made by Bombardier for years to come.

And finally, there’s the potential for the company to get a bailout from the federal government. Many people aren’t sure such a bailout is really necessary–including at least one member of Bombardier’s senior management–but it is a nice backup plan for bullish investors to have.

The bear case

Although it does appear that Bombardier’s days of burning massive amounts of cash are behind it, the company is still facing some difficulties.

Earnings are expected to still be negative for 2016, mostly because CSeries production won’t really ramp up until the second half of the year. Expectations are for earnings of negative $0.12 per share for this year. Things get a little better in 2017, with analysts projecting a breakeven year. Still, that’s not really enough to instill confidence, especially since CSeries production should be rolling right along by then.

There’s also the ongoing threat from competitors. When the CSeries was first introduced, it was truly a revolutionary plane. But the offerings from its two main competitors (Boeing and Airbus) have improved while CSeries production stalled. The risk of customers choosing these planes over Bombardier’s offerings is high.

Bombardier has become a trading stock. Investors flood in when there’s expectations of good news. But they’ll also get out quickly if news becomes less positive, which means shares could easily sink by anywhere from 10% to 50% in a short period of time. In any case, investors should continue to expect volatility in the stock.

There’s little doubt Bombardier still has massive upside potential. Long term, Bombardier could turn out to be a huge winner. Investors just have to be careful about the stock’s volatility, at least in the next few months.  Investors should expect just about anything to happen with this volatile stock.  It won’t be a smooth ride, that’s for sure.

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 Nelson Smith has no position in any stocks mentioned.

More on Investing

Shopping and e-commerce
Tech Stocks

1 Tech Stock You’ll Be Glad You Bought When the Bull Market Starts

Historically, tech stocks have done well during bull markets. Here’s one you’ll be happy you bought before the next bull…

Read more »

edit Safety First illustration
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

These three dividend stocks are all high-quality companies with defensive operations, making them some of the safest investments in Canada.

Read more »

data analyze research
Bank Stocks

Better Buy: Royal Bank Stock or Bank of Nova Scotia?

Bank stocks appear cheap after the latest plunge. Is Royal Bank or Bank of Nova Scotia a buy today?

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

3 Stocks to Anchor Your Portfolio in a Rocky Market

Three stocks are solid anchors in any portfolio today for their outperformance in a weak market and defiance of the…

Read more »

Metals and Mining Stocks

Better Metals Buy: Gold Stocks vs. Lithium Stocks

Gold is the evergreen choice as a hedge against inflation and weak markets. In contrast, battery metals may offer unique…

Read more »

Man making notes on graphs and charts
Bank Stocks

TD Bank Stock: A TSX Top Pick Amid U.S. Banking Rout?

TD Bank (TSX:TD) stock could prove a worthy bet for brave investors who aren't fearful over the recent wave of…

Read more »

edit Sale sign, value, discount
Tech Stocks

2 Cheap Tech Stocks to Buy Right Now

Many tech stocks offer exceptional returns compared to other stock sectors when the market is bullish. You can add to…

Read more »

money cash dividends
Dividend Stocks

3 Solid Dividend Stocks That Cost Less Than $30

Given their solid financials and healthy cash flows, the following under-$30 dividend stocks are a good buy in this volatile…

Read more »