Bombardier (TSX:BBD.B) stock is already down 73%. Can it fall further? Yes, it can. Bombardier shareholders should brace for the impact as Standard & Poor’s removes the stock from the TSX Composite Index. Many ETFs that track the index will sell their positions, and some retail investors may sell out of panic. The stock, which is trading 27% above its 52-week low of $0.38, could make a new low.
The bearish sentiment for the stock comes as the TSX Composite Index is a barometre of the Canadian economy, and exclusion from the index shows that the stock is underperforming the economy. The COVID-19 pandemic outbreak sent the index down 34% in March. With partial recover, the index is down 11% year to date. During a downturn, investors look to buy defensive or value stocks that outperform the TSX Composite Index, and Bombardier is neither of the two.
The bearish case of Bombardier
Bombardier has significantly underperformed the index and failed to show any signs of recovery. The company has been making losses for four out of the last five years. It underwent a multi-year restructuring. It has sold its commercial aerospace operations and is selling its rail operations in favour of business jets programs — Challenger, Learjet, and Global Express. The company plans to use the proceeds from the sale to repay its debt, which is worth $10 billion.
Bombardier-Alstom deal is exposed to the pandemic uncertainty
However, the pandemic has worsened the economic conditions for Bombardier, leaving the company’s restructuring efforts in the dust. Firstly, the company is selling its rail business to Alstom for US$6.4 billion. It expects to complete the deal in the first half of 2021. So far, the transaction is on track, and both the companies are sticking to the original terms. However, one year is a long time. Many capital-intensive companies are downsizing in the current market situation. Depending on how the economic conditions play out, the deal could be revised, suspended, or cancelled.
Business jets are not a good business to be in the pandemic
Secondly, the pandemic has affected demand for business jets, Bombardier’s only operations left after restructuring. The COVID-19 pandemic disrupted travel and pushed corporate to remote working. Business jets operations, which were unaffected during the 2008 financial crisis, are also facing the impact of the coronavirus crisis. The company expects business jet demand to fall by 30-35% and is, therefore, cutting 2,500 jobs in that segment.
The aerospace industry is in a multi-year downturn
Lastly, if the problem was only with Bombardier, there was still hope for recovery. But the entire aerospace supply chain has taken a hit. Everyone, from rivals Boeing and Airbus to engine manufacturer Rolls Royce to airlines like Air Canada, has announced significant job cuts. The entire industry will take at least three years to recover.
Even before taking into account the above three factors, Bombardier reported a net loss of US$200 million and a net debt of around US$8 billion in the first quarter. The company reported negative free cash flow of US$1.6 billion and just US$2 billion in cash reserve. While the company was bleeding losses, its former CEO Alain Bellemare left the company with generous severance pay of $17.5 million.
Investors should brace for impact
The economy, industry, and fundamentals … nothing is in favour of Bombardier. And now, the stock market is also adding to its difficulties. Bombardier stock was listed in the TSX 60 index at the start of the year. But it is now being excluded even from the TSX Composite Index of 250 shares. The stock could fall double digits in the coming week, which will see more sellers than buyers. If you own the stock, brace for a steep decline this week. It is not a value stock that will generate returns in the future. Hence, it is better to sell this stock and invest it in other stocks that can at least earn market returns.
