Bombardier, Inc. (TSX:BBD.B) is off to a positive start to 2017.
Let’s take a look at the train and plane maker to see if it finally deserves to be in your portfolio.
Recovery mode
A year ago, it looked like Bombardier was headed for bankruptcy.
The company hadn’t signed a new deal for its beleaguered CSeries jets since September 2014, and it was burning through cash at such an alarming rate, investors started to give up hope. Commitments of US$2.5 billion from Quebec and the province’s pension fund should have appeased market concerns, but the stock still slipped below $1 per share.
Then things began to turn around.
Bombardier received a large CSeries order from Air Canada followed by another from Delta Air Lines.
These deals brought some much-needed credibility to the program and pushed Bombardier’s CSeries order book above its target of 300 planes before the initial commercial flights.
After more than two years of delays, Bombardier delivered its first CSeries in the summer. This marked an important milestone for the company as the program finally started generating revenue.
As we move through 2017, investors will want to see existing orders delivered on schedule and new orders generated at better margins.
What’s the issue?
Bombardier had expected to deliver 15 CSeries jets in 2016, but reduced the target to seven in early September, citing delays from the engine supplier.
As of September 30, the company had delivered two CS100 jets. Bombardier announced the delivery of its first CS300 jet in November with first commercial operation in December. Based on that information, it looks like the company delivered three CSeries planes in 2016.
Delivery delays are frustrating for customers, but the big concern for investors is the impact on cash flow because airlines typically don’t pay until the orders are fulfilled.
What about margins?
New orders are better than no orders, but the planes have to be sold at profitable prices.
Bombardier booked an “onerous” contract charge of about US$500 million in Q2 2016 connected to the CSeries planes it sold in the first half of the year. Considering the dire situation, it is understandable that the company had to take a hit to get the ball rolling. Going forward, however, investors will want to see new CSeries orders at better margins.
Rail group
Bombardier Transportation continues to win additional rail contracts, but high-profile delays on orders for Toronto and Metrolinx appear to be impacting terms on new deals.
What’s up?
Bombardier just announced an agreement with Austrian Federal Railways which could include up to 300 trains worth US$1.9 billion.
The initial agreement is for just three trains at a list price of US$156 million. If Bombardier can meet its 2019 delivery obligation, the contract might reach its full potential.
If not, Austrian Federal Railways has “call offs” built into the contract that give it flexibility to modify the agreement. That isn’t great from a shareholder perspective because investors can only count on the initial part of the deal when evaluating the stock.
Should you buy?
Investors are nonetheless feeling more confident about Bombardier’s prospects, and the share price is now at a 12-month high.
At this point, however, the stock looks fully valued given the ongoing uncertainty in CSeries deliveries and additional sales. The US$9 billion in debt also remains a concern.
Things are certainly better than they were a year ago, but I would wait for the Q4 2016 numbers and new guidance on both CSeries and rail deliveries to come out before starting a position in the stock.
