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Should Investors Worry About Bombardier, Inc. and its Cancelled Contract?

Bombardier, Inc. (TSX:BBD.B) has made great progress with contracts it locked in with many other firms over the last few months, but, most recently, Metrolinx, a provincial transit agency, has filed a notice of intent to cancel a contract worth north of $700 million.

This can be quite alarming for investors, as Bombardier was finally gaining some momentum from the contracts it was locking in. Bombardier does have a damaged reputation, as the company has shown to be very sloppy regarding timelines as well as budgeting.

Warren Buffett used to say, “It takes 20 years to build a reputation and five minutes to ruin it.” In the case of Bombardier, it has ruined it reputation on numerous occasions, especially with the late, over budget delivery of the CSeries project. Its partners realize that Bombardier is a poorly managed company, and that the company’s word really doesn’t mean anything, especially the time of delivery, which is almost guaranteed to be late.

Metrolinx and its contract cancellation is just one example of how Bombardier’s damaged reputation caused it to lose a much-needed deal. Metrolinx ordered 125 commuter rail cars from Bombardier; however, Metrolinx lost its confidence in Bombardier, saying that Bombardier called the delay “normal” and wouldn’t even give a reason for such a delay.

This kind of management is unacceptable, and Bombardier’s reputation as a company is losing credibility each time it has delays. There’s no question that it’s going to take years to repair the damage to its reputation, and the Quebec government could soon get sick of bailing out such an incompetent management team.

Certainty is definitely key when you’re doing business, and breaking promises won’t help attract any more clients. The transport minister stated “we need certainty,” and, in the case of Bombardier, there was none.

Will more contracts be cancelled?

One of the major tailwinds was the number of contracts Bombardier was locking in, both in its train and plane segments. But what if Bombardier keeps failing to deliver? We can expect more contracts to be cancelled by much bigger clients, such as Air Canada, if such delays and poor excuses keep happening.

There’s no question that Bombardier needs to be managed better, but I believe that Bombardier is doing its best to turn the business around. Bombardier is at a fine line that’s between recovering and going back into the gutter, where they’ll need another government bailout.

If you’re an investor in Bombardier, I would stay the course, as I believe there’s huge upside to be had if Bombardier can actually deliver on its contracts. If it can do this, the stock will soar, and if it can’t, well … we all know what will happen to the stock, as its been on a downward trajectory for quite some time.

I think Bombardier has great potential, but the news of Metrolinx’s cancelled contract is not a sign of progress in the managerial department at Bombardier, and that is very concerning to investors. If they can stand by their word and give accurate delivery dates, then Bombardier would have no problem moving back to higher levels.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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