Bombardier (TSX: BBD.B) announced earlier this week that the company would be selling its CRJ jet program to Mitsubishi Heavy Industries. The company will receive US$550 million, and Mitsubishi will take on $200 million in liabilities related to the jets.
It’s another big move for Bombardier, as a couple of years ago the company got rid of half of its CSeries jets for nothing.
Is this a good move for Bombardier?
Ultimately, this is going to let the company focus more on its core operations. In its most recent fiscal year end, the company’s commercial aircraft segment generated just $1.8 billion in revenue and was the smallest segment of its operations. Transportation continues to lead the way with $8.9 billion in revenues for all of 2018. Commercial aircraft was actually the only segment in 2018 that recorded a negative EBIT number of $755 million, with the transportation segment producing a near mirror image with a positive EBIT of $774 million.
For Bombardier to get rid of an underperforming part of its business while injecting the company with a lot of cash, it’s a move that makes a lot of sense to me. The company has been bleeding money, generating negative free cash flow in four of its last five periods. By taking away some of its losses, it’ll help to improve the company’s overall cash flow. Even though Bombardier has generated profits consistently over the past year, the company’s margins have been razor thin, with an average of just 2.5% of sales flowing through to its bottom line.
Will this help give the stock a boost?
Over the past year, Bombardier has lost more than half of its value, and it’s struggled in some cases to even stay above $2 a share. It’s a move that should get some more excitement around the stock again. Any time a company refocuses on its core business and looks to get out of unprofitable segments, a move like this is definitely a good decision to make. To put it into perspective, commercial aircraft made up just 11% of the company’s sales in 2018, and the company’s profits would have been 75% higher if not for the segment dragging it down over the course of the year.
From a sales point of view, it’s always disappointing to see a company cut out a piece of its top line. However, the big concerns around Bombardier stock have been the company’s lack of profitability and lots of cash burn. This sale addresses both of those issues, and the company is certainly in a better position with more cash on its books and fewer segments to operate.
Bottom line
Bombardier has a great opportunity to turn things around, and I wouldn’t be surprised if the company starts to rally on these results. Although it may still have a long way in convincing investors that it can consistently produce strong quarters, it’s definitely a step in the right direction.
