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.
