Bombardier (TSX: BBD.B) saw its stock price fall nearly 25% November 8 after the company announced a major layoff and the disposition of two of its business units.
Once all the dust settled, Bombardier closed the session at $2.41 per share, taking the stock price to a new 12-month low and down roughly 55% from the high it hit in the summer of 2018. Contrarian investors are now wondering if this is a good opportunity to add the stock to their portfolios.
Turnaround woes
Investors thought Bombardier’s worst days were behind it after the near-death experience in early 2016 that saw the share price fall to $0.80 amid fears the company was headed for insolvency. At the time, Bombardier was burning through serious cash, carried a mountain of debt, and hadn’t received any new orders for its troubled CSeries jet program since the fall of 2014. Even the commitment of US$2.5 billion from Quebec and the province’s pension fund couldn’t stall the downward spiral.
At the last moment, Air Canada stepped in with a large CSeries order followed by one from Delta Air Lines. Those orders bought the company some time, but they were done at very low prices, and less than three years later, Bombardier is plagued by the same issues.
Bombardier sold a majority stake in the CSeries to Airbus in July this year to save the Delta deal. The U.S. wanted to slap dumping tariffs of nearly 300% on the planes destined for the U.S., so Bombardier flipped control of the business to Airbus, which will make the planes (now named A220) destined for U.S. customers at facilities in Alabama.
Once Airbus took control of the program, investors thought orders would fly in, but that hasn’t happened. Airbus isn’t in a hurry to sell the planes at a loss, and airlines might not want to pay a fair price.
Meanwhile, Bombardier’s transport group continues to work through manufacturing and competition challenges. The rail division has dropped the ball on a few light-rail contracts, including the highly-publicized battle with the Toronto Transit Commission, which might be hurting its ability to win new deals.
Chicago and Boston chose a Chinese competitor over Bombardier in their latest transit bids, and the potential merger of the train groups at Alstom and Siemens in Europe could spell trouble down the road.
Bombardier’s new management team has made some progress on improving margins and streamlining operations, and they aren’t afraid to make difficult decisions, including the latest job-cut announcement that will see the company part ways with 5,000 positions, of which 2,500 are in Quebec.
Debt bomb
That said, the spin can only go so far, and the legacy issues remain. Bombardier is carrying US$9.5 billion in adjusted long-debt and burned through US$370 million in cash Q3 2018.
The company finished Q3 2018 with US$2.3 billion in cash and cash equivalents and just under US$1.3 billion in available credit, giving the company total capital resources of about US$3.6 billion. By the end of 2021, Bombardier has more than US$3.1 billion in debt coming due. Another US$1.7 billion is due in 2022.
If the current rate of cash flow burn isn’t reversed very quickly, Bombardier could find itself in another cash crunch. There is going to be very little appetite or support for more government bailouts, and the debt market will want too high a premium. Another major equity sale is probably off the table, so things might get ugly again if the turnaround plan hits a speed bump in the next three years.
Should you buy?
Bargain hunters initially jumped in on November 9 thinking the sell-off might be overdone, but I would avoid the temptation to buy the stock right now. At this point, Bombardier’s turnaround efforts still face some significant headwinds.
Other opportunities in the market might be better bets heading into 2019.
