Contrarian Investors: Should Bombardier, Inc. Be on Your Shopping List?

Bombardier, Inc. (TSX:BBD.B) is making progress on its turnaround efforts. Is it time to buy this stock?

| More on:
The Motley Fool

Bombardier, Inc. (TSX:BBD.B) has stabilized in the back half of 2016, and investors are wondering if this is the right time to add the stock to their portfolios.

Let’s take a look at the current situation to see if the plane and train maker is an attractive contrarian pick today.

Rosy outlook

Bombardier’s management team seems to think 2017 is going to be a great year.

The company is targeting 50% adjusted earnings growth, driven by extensive cost cuts that will come as part of its restructuring activities, including the elimination of more than 14,000 jobs.

Beyond next year, Bombardier says it is still targeting breakeven cash flow by the end of 2018 and US$25 billion in revenue by 2020.

The company expects to see a 1-3% year-over-year increase in revenue in 2017.

More government aid

Bombardier received US$2.5 billion in 2016 from Quebec and the province’s pension fund, the CDPQ. The province forked over US$1 billion for a 49.5% stake in the CSeries program, and the CDPQ invested US$1.5 billion to acquire a 30% position in Bombardier Transportation, which is the rail division.

Bombardier also asked the federal government for US$1 billion last year, and is still ironing out a deal. The company says it now has the funds it needs to achieve its turnaround plan, but it’s looking for money from Ottawa to serve as as a buffer against any unexpected risks.

CSeries orders

The CSeries program is responsible for most of the pain the company and its shareholders have endured in recent years.

Back in February, Bombardier’s shares dropped below $1 as investors worried the CSeries was headed for the dust bin. The company hadn’t received a new order since September 2014.

Then Air Canada came to the rescue, followed by another large order from Delta Air Lines. The two deals probably saved the company, but analysts are concerned Bombardier might not make any money on those sales. The company took an “onerous” US$500 million charge against the CSeries planes that were sold in the first half of the year.

Going forward, investors will want to see another large order from a major carrier, but at better margins. If that happens, the stock could really take off as the market would start to believe the company might actually succeed.

Train trouble

Bombardier’s rail division has its own issues. The group is struggling to meet its obligations on a streetcar order for Toronto and for Light Rail Vehicles (LRVs) for Metrolinx, which is responsible for regional transport in Ontario.

Toronto has actually threatened to sue Bombardier, and Metrolinx recently announced plans to start the process of cancelling the order for 182 LRVs.

Whether or not anything will come of the threats is yet to be seen, but the rail group has a lot of work to do to get its act together.

Should you buy?

Bombardier is doing a good job of keeping up the positive spin, and it seems the analyst community is beginning to buy the hype.

I’m still not convinced the turnaround is fully on track, and the nearly US$9 billion debt load remains a significant risk.

Things are getting better, but I would still avoid the stock today.

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 Andrew Walker has no position in any stocks mentioned.

More on Investing

A stock price graph showing growth over time
Dividend Stocks

2 Safe TSX Stocks to Add to Your TFSA Amid Rising Volatility

Given their stable underlying businesses and healthy growth prospects, I'm bullish on these two low-volatility TSX stocks.

Read more »

A golden egg in a nest
Dividend Stocks

How to Turn $5 Into $50,000 for Retirement

Can you invest in your retirement goals even in this volatile market? The answer is yes, and an investment amount…

Read more »

Glass piggy bank
Dividend Stocks

Compound Interest: 3 Dividend Stocks That Can Make You Rich

If you're looking to maximize the incredible powers of compound interest while investing for the long haul, here are three…

Read more »

Dice engraved with the words buy and sell
Investing

3 TSX Stocks I Will “Never” Sell

The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is one Canadian stock I will never sell.

Read more »

Clean energy
Energy Stocks

TSX From Windfall to Free Fall: Where is the Value?  

The TSX Composite Index is in a free fall after windfall gains from tech and energy stocks. Where to look…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

TFSA Wealth: How Top Dividend Stocks Can Turn $10,000 Into $185,000

Here's how owning top TSX dividend stocks can help you build TFSA retirement wealth.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Dividend Stocks

Passive Income Seekers: Buy These 6%+ Dividend Stocks Before It’s Too Late!

These three dividend stocks all offer passive income above 6.5%! But don't plan on these valuable rates lasting long.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

3 Ways to Make Money From Suncor Energy (TSX:SU) Stock 

Suncor Energy (TSX:SU)(NYSE:SU) stock attracted investors seeking exposure to the oil price. Here's how to make money from it.

Read more »