Bombardier’s (TSX:BBD.B) Brexit Woes

Bombardier, Inc. (TSX:BBD.B) is now a proxy for the Brexit outcome.

| More on:
Plane on runway, aircraft

Image source: Getty Images.

As Northern Ireland’s biggest manufacturing employer, Bombardier (TSX:BBD.B) is at the epicentre of Europe’s biggest political challenge in decades: Brexit. Britain’s decision to leave the European Union later this year could have a severe impact on Bombardier’s operations in and around the region.

The Canadian transportation giant employs more than 4,000 people at various locations around the Irish capital city of Belfast. These employees manufacture the wings for the company’s A220 aircraft formerly known as the CSeries.

The A220 is no ordinary aircraft. Experts consider it the most game-changing plane since Boeing’s 787. Built to accommodate between 100 and 150 passengers, the A220 uses lighter materials, redesigned engines, and cutting-edge aerodynamics to make the plane both fuel-efficient and comfortable for passengers. Each unit costs between US$80 million to US$90 million.

Created to fill the gap between wide-bodied jets and regional aircraft, the A220 was the first plane Bombardier had attempted to create entirely in-house. However, the process went over budget and was delayed numerous times, nearly bankrupting the company last year.

The project and the company were saved by a partnership deal with Airbus. Airbus employs 14,000 people in Britain, and the company’s management has been vocal about the negative impacts of a hard Brexit. CEO Tom Enders called the exit process a “disgrace” and said the company will have to move operations out of the region if no deal is struck.

Meanwhile, Bombardier has been pushing for an orderly Brexit since the start of this year.

A recent BBC report suggests the company has already spent £30 million ($52.3 million) to stockpile parts to mitigate the damage from a no-deal Brexit. According to the company’s latest financial report, 46% of its revenue is generated in Europe and 22% is derived from U.K. operations.

A disruption to trade and manufacturing in Ireland isn’t the only threat to Bombardier’s bottom line. A sudden swing in the euro or the British pound against the U.S. dollar could slash the revenue and profits generated in this region. A spike in inflation could also make it difficult for British and European airlines, Bombardier’s most important customers, to buy its products.

These risks are not limited to Bombardier. Most businesses in this sector may have to face negative consequences, volatile currency swings, and job cuts if the exit is disorderly. However, Bombardier’s near bankruptcy last year puts it in a particularly vulnerable position.

The A220 program is only just ramping up. A mere 60 units have been delivered so far. Meanwhile, the company has invested over US$6 billion in the program. Much of the firm’s growth expectations hinge on the success of this critical project.   

Perhaps the biggest risk factor is the company’s debt burden. The firm’s long-term debt is now worth $9.1 billion, or 37% more than its market capitalization.

Although the company’s cash flow situation has improved in its most recent quarter and the stock is up by nearly 40% since the start of the year, its survival is still far from certain. A recession in North America or a political crisis in Europe could derail the turnaround.

Bottom line

Bombardier is probably the only Canadian firm that is exposed to the fallout from Brexit to this extent. Traders and investors can use the stock as a proxy to bet on the outcome of this monumental shift in British politics.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any stocks mentioned. 

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »