In 2016, shares of Bombardier (TSX: BBD.B) fell to an all-time low of just $0.80. Bankruptcy fears were swirling, largely focusing on the company’s failing CSeries jets. It wasn’t that the jets themselves were defective, but that the designs simply didn’t appeal to market demand.
Over the next two years, shares rose by more than 500% following an incredible streak of good news. Notably, both the Canadian and U.K. governments stepped in with financing. Then Airbus took a controlling stake in the CSeries program.
Bolstered by the partnership, Bombardier’s Commercial Aircraft president Fred Cromer relayed his belief that the company’s revamped CSeries jet could take “half or more” of the market. That’s a huge change from a few years ago, where the entire program was at risk of cancellation.
By the end of 2017, free cash flow hit $872 million in the fourth quarter, its highest level in nearly a decade.
Bombardier took advantage of its rising share price, selling $500 million in stock at roughly $4 per share in March of 2018. At the time, it seemed like nothing could stop the rise of Bombardier. “We are moving out of our investment cycle and into a strong growth cycle,” commented CEO Alain Bellemare.
Tough times have returned
In November, Bombardier stock dropped 20% in a single day after a Canadian regulatory agency decided to review the company’s executive stock program. The agency ordered all related transactions to halt immediately. The long-term repercussions are still unknown, but any investigation brings uncertain risks.
In December, Bombardier was dealt a heavy blow when it lost a $1 billion contract to Siemens AG to supply new trains for the rail corridor between Quebec City and Windsor. Reportedly, the decision was made with “on-time delivery” in mind, likely meaning it was doubtful that Bombardier could supply the locomotives and cars fast enough.
To make matters worse, Siemens also walked away with a 15-year maintenance contract worth $355 million.
Around the same time, Brazil’s antitrust authority recommended the conviction of 16 companies that formed a price-fixing group for train contracts across the country. Bombardier was listed as one of the guilty parties.
If convicted, Bombardier would be forced to pay back 20% of its related revenues. That could be a huge blow considering the contracts spanned major projects in metro areas like Sao Paulo and Brasilia.
Conditions are turning even worse
In January, New York City halted new train deliveries from Bombardier after problems were discovered in their air compressor software. According to NYC Transit’s leadership, Bombardier “is not making a case to win future rail contracts in light of performance problems and delivery delays on the 300-subway car order.”
Incredibly, there are a few additional headwinds Bombardier is currently facing, including ongoing issues with a Swiss train order (which is now four years delayed) and an accusation from Mitsubishi Corp that it is engaging in “anti-competitive conduct.”
While there may be a brief snapback following the resolution of one of these headwinds, Bombardier will remain in a difficult position.
If you had bought the company’s stock in 2004, you would have experienced a 0% return over the next 15 years. Inept management, hyper-competition, and capital-intensive contracts are to blame. All of these issues remain today and won’t abate in the years to come.
