Bombardier, Inc. (TSX:BBD.B) is up 55% year-to-date and has more than doubled off the February low.
Let’s take a look at Canada’s plane and train maker to see if the good times are set to continue in 2017.
At the beginning of 2016, it looked like Bombardier was headed for bankruptcy. The company hadn’t signed a new order for its CSeries jets since September 2014, and low fuel prices suggested demand might remain weak for the energy-efficient planes.
Without prospects of a significant revenue boost, the US$9 billion debt level began to really frighten investors, despite US$2.5 billion in funding commitments from Quebec and the province’s pension fund.
Then things began to turn around, and the stock has been flying high ever since.
Air Canada and Delta Air Lines came to the rescue with major CSeries orders. This gave the program a credibility boost and scared short sellers out of the stock.
Bombardier delivered its first CSeries planes in the summer and recently announced another small order.
One thing to keep in mind is the fact that the Q2 earnings report showed that the company took a US$500 million charge due to significant discounts provided to get the Delta and Air Canada deals, so CSeries margins will be important to watch going forward.
If Bombardier can secure another large CSeries order in the first half of 2017 at a better price point, the stock could repeat its strong performance.
The company is definitely in better shape than it was at the beginning of the year, but risks still remain.
Bombardier continues to burn through significant cash flow and is struggling to meet delivery targets on both the CSeries planes and some of its rail contracts.
The company originally planned to deliver 15 CSeries jets in 2016. That number was cut in half due to difficulties at a supplier.
The rail group is taking serious heat for serial missteps on a Toronto streetcar order, and Metrolinx, the agency responsible for regional rail transport in Ontario, has started the process of cancelling a 2010 order for up to 182 Bombardier LRVs.
The production issues will eventually be sorted out, and Bombardier continues to win new Metrolinx contracts for other projects, so the transit agency’s bark could turn out to be worse than its bite.
Nonetheless, the delays might be having an impact on deals in other markets.
For example, Bombardier lost two rail contracts in the U.S. over the past two years. A state-owned Chinese company outbid Bombardier for the deals and agreed to assemble some of the trains in the United States. If the Chinese can deliver the trains on schedule, it could spell trouble for Bombardier in the U.S. market going forward.
Should you buy?
Bombardier is flying high at the moment, and more success in the CSeries group could boost the stock price next year, so there is a chance investors will do well in 2017.
At this point, however, the debt situation is still a concern, and most of the positive news appears priced in. I would like to see a strong CSeries order without the company having to take an “onerous” provision on the sale, before buying the stock.
As such, I’m more inclined to look elsewhere for opportunities today.