Bombardier, Inc. (TSX:BBD.B) has chalked up an impressive 2016, and investors are wondering if the upward momentum will continue into next year.
Let’s take a look at the current situation to see where things stand.
An impressive turnaround
Bombardier began 2016 in big trouble.
Heavy debt and a struggling CSeries jet program had investors running for the exits. Some pundits were even preparing epitaphs for the beleaguered plane and train maker.
Sometimes the market over reacts, but in February of this year, it looked like investors were right to be concerned.
Bombardier hadn’t signed a new order for its CSeries since September 2014, and there didn’t appear to be much industry interest in the new planes.
Why?
The CSeries had been marketed as a fuel-efficient replacement for older jets. That was a strong selling point when WTI oil was at US$100 per barrel, but potential customers started doing the numbers as fuel prices fell through 2015, leading many to lease or buy older planes rather than pay up for the new jets.
The first CSeries was supposed to be delivered and in commercial operation in 2013, so extensive delays in the program probably made the situation worse along the way.
As WTI oil plunged below US$30 per barrel, it started to look like Bombardier had missed its window of opportunity to make the CSeries program a success. Faithful investors started to throw in the towel, and the stock dipped below $1 per share.
At the point where it seemed the company was doomed, a new order came in, and Bombardier was suddenly back on track.
Air Canada might be credited with saving Bombardier. The company placed a large order in February that brought some credibility to the CSeries program. Air Baltic then exercised an option to add more planes to its existing order, and Delta Air Lines cemented the recovery with its massive purchase in April.
Suddenly, Bombardier had surpassed its order-book target and was off to the races.
The company delivered its first CSeries jets in the summer and is now working through extensive cost cuts to ensure the turnaround plan remains on track.
Should you buy?
The stock currently trades at $2.15 per share — more than double the low it hit earlier in the year.
Things are heading in the right direction, but investors should be careful jumping on the bandwagon as risks remain.
Bombardier is still carrying close to US$9 billion in debt and just replaced notes that were coming due with new debt that is more expensive. As interest rates continue to rise, that trend could continue, unless the market starts to perceive the debt as less risky.
The CSeries program appears to be back on track, but more work has to be done. The company had to cut its 2016 delivery target from 15 planes to seven due to a problem with the engine supplier. Further delays in 2017 could put added pressure on cash flow.
Margins are also an item to watch next year. Bombardier took an “onerous” US$500 million charge in Q2 2016 connected to the planes it sold in the first half of the year. Discounts are a normal part of the sales process, but analysts widely believe Bombardier had to provide significant incentives to get the Delta and Air Canada deals.
Going forward, investors will want to see sales at better prices. Otherwise, the breakeven date for the program could get pushed out beyond 2020.
Bombardier’s train division has its own issues to sort out. A streetcar order for Toronto is way behind schedule, and Metrolinx, which is Ontario’s agency responsible for regional transport, recently began a process to cancel a 2010 order for up to 182 Bombardier LRVs.
So, there are still some speed bumps along the runway to recovery.
Contrarian types might want to look at starting a small position on a pullback, but I think the stock is still too risky, especially at the current price.
