Bombardier, Inc. (TSX:BBD.B) appears to have stabilized after some nasty turbulence at the beginning of the year.
Let’s take a look at the current situation to see if this is the right time to buy.
Big rally
Bombardier is up more than 150% since early February, and some investors are wondering what sparked the drastic turnaround.
The rally began when Air Canada signed a letter of intent to buy 45 CSeries jets. Investors piled into the stock on the news because it was the first order for the beleaguered planes since September 2014.
Air Baltic then converted an option for seven planes to a firm order, which gave investors another reason to buy as they figured something good must be happening for the company to suddenly score two new deals in such a short period of time.
While this was going on, media reports of a potential bailout by the federal government helped convince the market that a financial safety net would soon be in place to ensure the company stayed solvent.
Bombardier then announced a contract to supply Delta Air Lines with 75 new CSeries jets. The deal scared away the remaining short sellers and sent the stock soaring above $2 per share, where it has more less stayed for the past month. In February, the stock was below $0.80 per share.
Risks
New orders are certainly better than no orders, but investors should be careful.
The Air Canada deal still isn’t firm, and negotiations are starting to drag on longer than initially expected. Air Canada placed the order in February, and in early April the company said the agreement will be firmed up “within weeks.”
A Reuters report suggests Bombardier might have discounted the CSeries by as much as 75% to get the Delta deal. Management says the program is still on track to turn a profit in 2020, but investors have no way of knowing how tight the margins are on the latest orders.
Shortly after the Air Canada announcement, Republic Airways filed for bankruptcy, putting an already shaky order for 40 CSeries jets on thin ice. Analysts now expect that deal to be cancelled.
Other issues
Bombardier’s corporate jet business is stuck in the mud as global demand plummets due to the meltdown in the energy market and economic woes in Russia and Brazil.
Bombardier Transport, the company’s train division, is also hitting some turbulence. The group is struggling to meet its commitments on a large streetcar order for Toronto and has been losing big deals to Chinese competitors in the U.S. market.
Bombardier is still carrying a mountain of debt and has been forced to turn to the Quebec government and its pension fund to raise the capital needed to stay afloat. Negotiations are ongoing with Ottawa for additional aid.
Buy, sell, or hold?
Investors who stepped in at $1 might consider taking profits, and fans of the company should probably wait for the first CSeries to be delivered before buying the stock.
For contrarian types, I think there are better options in the market right now.
