Bombardier, Inc.: Investors Are Confident After a Solid Quarter

Bombardier, Inc. (TSX:BBD.B) encouraged investors with recent results. This turnaround appears to be working.

| More on:
The Motley Fool

Quietly amid all the chaos of Donald Trump’s surprise victory, Bombardier, Inc. (TSX:BBD.B) released quarterly earnings on Thursday.

Results were much better than expected. The company lost $0.04 per share, but that number was closer to break even on an adjusted basis. That beat analyst expectations of a loss of $0.03 per share. Revenue was down approximately 10% compared with the same quarter last year, but that was expected.

What really excited investors was the company’s outlook. It told the market that earnings before interest and taxes for the year would be between US$350 million and US$400 million–in the upper range of its previous guidance, which was between US$200 million and US$400 million.

Revenue guidance wasn’t quite as robust; that number was projected to come in at US$16.5 billion, which is in the bottom part of the previous guidance range.

Although the company cut its remaining CSeries production target from 15 to seven in 2016 because of shortages from its engine supplier, it remains on track to hit 2017 production guidance, which calls for it to build 30-35 CSeries jets.

In short, it was a solid quarter and good guidance from a company that could desperately use a little good news. That made investors happy, who responded by sending shares soaring nearly 10%.

The bigger picture

Bombardier took on a ton of debt when it built out the CSeries program. It currently owes nearly US$9 billion to creditors–a massive amount for a company projected to only earn $400 million in earnings before interest and taxes this year.

And remember, the company did recently get a cash injection from the Quebec government for US$2.5 billion.

The good news is that the days of Bombardier burning large amounts of cash each quarter appear to be over. It ended the second quarter with US$3.81 billion in the bank. After the third quarter, it had $3.77 billion in cash. Debt even went down during the same period, dropping from $9 billion to $8.96 billion.

That’s what investors want to see, even if it does appear to just be baby steps.

There’s even the possibility of it starting to generate some free cash flow in 2017. The company is halfway through an ambitious cost-cutting program, which will eliminate some 15,000 jobs and save it between US$500 and US$600 million per year. Bombardier has small margins at the best of times, so anything that can save it money will really help.

In short, Bombardier has promised investors it would turn things around, and it looks like the plan is working.

A word of caution

There are plenty of reasons to be bullish on Bombardier, but to borrow a baseball analogy, we’re in about the third inning of a turnaround.

It has a long way to go. While initial reports from CSeries customers are good, Bombardier still needs to ramp up production to compete with its larger rivals–30 to 35 jets per year isn’t going to impress big customers.

Both its business jet and transportation divisions are experiencing some difficulties, including an issue with Metrolinx, the Ontario government’s transportation agency, which said it intends to cancel a $700 million rail contract.

Debt also remains a huge issue. The company must pay down its debt and improve its credit rating. If it can get its interest rate down just 1%, that translates into annual savings of close to $100 million. If the debt remains high, so does the risk of bankruptcy.

The bottom line

Investors should be encouraged by Bombardier’s recent results. The cash burn was nonexistent, guidance was good, and cost cuts are proceeding nicely.

But we still need to be cautious. The company is on the right track. But it’s not out of the woods yet.

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

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Building a $50,000 Portfolio That Can Weather Any Market Storm

This defensive investment portfolio uses three ETFs to ride out any recession.

Read more »

Two seniors float in a pool.
Retirement

Want to Retire Rich? 3 TSX Stocks to Add to Your Portfolio Now

These TSX stocks could deliver above-average returns in the long run, helping you build wealth over time and retire rich.

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Top 3 TSX30 Winners: Understanding the Recent Stock Drop

Three TSX30 winners in 2024 have experienced price drops this year and continues to underperform due to massive headwinds.

Read more »

space ship model takes off
Dividend Stocks

Where to Put $12,000 in Today’s Market for Potential Long-Term Gains

There's no shortage of great investments that can provide potential long-term gains. Here's a look at three stellar options.

Read more »

Hand Protecting Senior Couple
Retirement

Avoid the OAS Clawback: Dividend Strategies Every Retiree Should Know

With a smart dividend strategy, the OAS clawback can be minimized or even avoided entirely for retirees. Here's how.

Read more »

Canadian dollars are printed
Dividend Stocks

How to Use $10,000 to Transform a TFSA Into a Cash Machine

Do you want growth and income? Consider these top investments that offer up monthly income in spades!

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

Building a $28,000 TFSA Portfolio One Contribution at a Time

Let’s take a look at how you can turn a $28,000 investment in a TFSA into a life-changing fund for…

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Making Your $25,000 TFSA Investment Work Harder for the Long Term

This strategy reduces risk while still providing a solid return.

Read more »