Bombardier, Inc. (TSX:BBD.B) is giving back some of its big gains, and investors are wondering if the recent slide is overdone.
Let’s take a look at the current situation to see if Canada’s iconic plane and train maker should be in your portfolio.
On the rebound
Early last year, it looked like Bombardier might be headed for bankruptcy protection.
The company hadn’t sold a new CSeries jet since September 2014 and was facing a cash-burn rate that would make your head spin. Investors sold the stock down below $1 per share.
Then things began to turn around.
Air Canada came to the rescue with a significant order for the beleaguered CSeries jets. Delta Air Lines signed up for even more planes a few months later, and, all of a sudden, the CSeries backlog was well above Bombardier’s initial 300-plane target.
In the summer, Bombardier delivered its first CSeries jets, marking a key milestone in the program, as the company finally began to generate some revenue from the project.
Difficulties with a supplier forced the company to reduce its 2016 CSeries delivery target from 15 planes to seven, but Bombardier managed to meet the reduced guidance in the final days of the year.
Management expects to deliver at least 30 CSeries planes in 2017, which will improve the program’s revenue situation and could motivate other major carriers to purchase the new jets.
On the funding front, Bombardier received US$2.5 billion from Quebec and the province’s pension fund, the CDPQ, last year.
Negotiations with Ottawa recently concluded with a $372.5 million commitment from the Federal Government. The cash will be provided as a repayable loan and handed out in installments over four years. Bombardier says it could be 15 years before it pays the funds back. The company had initially asked Ottawa for US$1 billion.
The fact that the government is providing much less suggests Bombardier’s cash flow situation is under control.
At the time of writing, the stock trades at $2.30 per share, so investors who had the courage to buy during the darkest days last winter are sitting on some nice gains.
Risks
Bombardier is on the mend, but it’s not out of the woods.
The company is carrying US$8.7 billion in debt and still expects to burn through at least $750 million in cash this year as it continues to ramp up production of the CSeries planes.
The Air Canada and Delta deals helped revive investor confidence in the stock, but Bombardier had to drop its price significantly to get the orders. In Q2 2016, the company booked a US$500 million charge connected to the planes sold in the first half of last year.
Management says it believes another large order is on the way. Investors will want to see evidence of better pricing when that happens, as the CSeries currently isn’t expected to be cash flow positive until 2020.
Challenges in the business jet and rail segments should also be considered when evaluating the stock.
Why?
Bombardier reported weaker-than-expected Q4 2016 results largely due to lower revenue in these sectors.
The company is struggling with manufacturing difficulties in the rail division that have resulted in extended delays in meeting a streetcar order for Toronto and a light-rail transit order for Ontario’s Metrolinx.
Metrolinx is actually trying to cancel its 2010 order for 182 light-rail vehicles.
Should you buy today?
Bombardier is slowly getting its house in order, and the recent pullback might look tempting, but the stock is still up more than 20% in the past three months, so investors should be careful.
At this point, I would wait for the reversal to run its course before adding Bombardier to the portfolio.
