A new investing year has arrived and investors are sifting through the carnage of 2018 to find beaten-up stocks that might be poised for a rebound.
Bombardier started 2018 at $3 per share and slowly moved higher through the first half of the year, topping $5.40 in July. Investors who bought the stock at the 2016 low near $0.80 per looked like investing wizards, and some analysts even started to get bullish on the company’s outlook.
Cost overruns and delayed revenue had put Bombardier in a rough financial position, and despite US$2.5 billion in commitments from Quebec and the province’s pension plan, the company appeared to be in trouble at the start of 2016. Bombardier shelved the dividend and brought in new management to turn the situation around. A last minute order from Air Canada followed by another purchase from Delta Air Lines put a floor under the stock and led to the rally.
Airbus took control of 50.1% of Bombardier’s CSeries program at the start of July 2018. Bombardier had struggled to find buyers willing to pay a reasonable price for the new planes, which was largely due to the lengthy delays in getting the jets produced and delivered to early buyers. Investors hoped the newly named A220 jets would enjoy a surge in demand from global airlines once the business was added to the Airbus fleet. This led to a surge in the stock to the 2018 high.
Unfortunately, Bombardier then went off the rails in the back half of the year.
The anticipated surge in orders for the A220 did not materialize. When Bombardier reported its Q3 2018 results, it also became evident that more work is required on the turnaround program. Management had done a good job of convincing the market the company was making good progress on its plan, and while the company has taken important steps to improve the overall situation, it is still burning through cash at a faster clip than some analysts expected.
In addition, Bombardier announced plans to cut 5,000 jobs, which hasn’t helped to boost investor confidence.
The stock’s decline then picked up speed on reports of an investigation into an executive stock sale program, and the share price hit a 2018 closing low of $1.67 on November 16. Bombardier is starting 2019 at roughly $2 per share.
The rail division recently won a bid to supply New Jersey with light rail transport vehicles. The deal provides hope that American cities are willing to give the company another chance. Bombardier has historically done well in the United States, but it lost bids in Boston and Chicago to Chinese firms in the past couple of years.
Manufacturing problems and extended delivery delays on a contract to supply the Toronto Transit commission (TTC) have potentially hurt the company in its quest for further deals. In early 2018, Montreal decided to go with Alstom for its light-rail expansion; later in the year Via Rail announced it will give a $1 billion contract to rival Siemens.
Should you buy?
Bombardier says it has corrected manufacturing problems in the rail business and Airbus should eventually secure large international orders for the A220. As a result, better days should be on the horizon.
However, Bombardier is carrying US$9.5 billion in debt with large chunks coming due starting in 2020. This means that Bombardier will have to start refinancing in 2019, and the pressure to become cash flow positive will ramp up in the coming quarters.
If you’re of the opinion the company is getting back on track, this might be an opportune time to take a small contrarian position in the stock. The previous surge in the stock price off the 2016 low is evidence of the upside potential when sentiment shifts.
That said, Bombardier has an unfortunate tendency to disappoint. Things could very well improve in 2019, but I would probably search for other opportunities today.
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Fool contributor Andrew Walker has no position in any stock mentioned.