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Is Bombardier, Inc. a Buy at $2?

Bombardier, Inc. (TSX:BBD.B) is down 20% in the past month.

Let’s take a look at Canada’s plane and train maker to see if the pullback is an opportunity to buy the stock.

Turbulent times

Bombardier’s investors are hoping the latest sell-off in the stock is simply a pause in a longer-term recovery.

The share price dropped below $1 last February amid concerns the company wasn’t going to survive its CSeries troubles, despite US$2.5 billion in commitments from Quebec and the province’s pension fund.

What was the problem?

Sales of the beleaguered CSeries jets had stalled since September 2014, as potential buyers worried about extended delays and favoured cheaper, older jets.

The CSeries is marketed on its fuel efficiency, which was a great selling point when WTI oil traded at US$100 per barrel. Unfortunately, Bombardier struggled to get the planes into service before the oil meltdown, and buyers simply had less motivation to purchase the new jets with oil below US$45.

With the situation becoming dire, Bombardier managed to secure large orders from Air Canada and Delta Air Lines in February and April last year.

The purchases gave the stock a lift back to $2, and the shares even touched $2.75 in recent months, but a US$500 million “onerous” charge taken in Q2 2016 suggests the company had to provide significant discounts to get the deals.

Moving forward, investors will want to see better margins on any new CSeries sales.

Weak markets

Bombardier’s CSeries troubles get most of the headlines, but the company is also battling difficulties in its other divisions.

According to the Q4 2016 earnings numbers, the business jet market remains under pressure. Bombardier believes the situation will begin to improve in the second half of 2017 and has negotiated financial aid from the Canadian government to help the company’s Global 7000 business jet program.

Rail division orders slipped 3.4% in 2016 compared to the previous year, and revenue in the group dropped 10% in the fourth quarter.

Bombardier is struggling with manufacturing challenges on some projects, including a streetcar order for Toronto and a light-rail-vehicle (LRV) order for Ontario’s Metrolinx.

The company is trying to prevent Metrolinx from cancelling the contract it signed back in 2010 for up to 182 Bombardier LRVs.

Should you buy?

Bombardier is carrying US$8.7 billion in debt, which is a lot for a company with a market capitalization of less than half that amount.

As interest rates rise, there is a risk the company will have to replace debt that comes due with more expensive notes, as it did in 2016, especially if the market doesn’t see an improvement in the company’s debt ratings.

While Bombardier is in better shape than it was a year ago, the turnaround isn’t complete, and the stock could be at risk of an additional hit if the broader market experiences a rough patch in the coming months.

Buying at $2 is certainly more attractive than the $2.75 somebody paid in January, but I would wait until the current pullback runs its course before taking a contrarian position in this stock.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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