Shares of private jet maker Bombardier (TSX:BBD.B) have been flying high since last year, even when the markets were weak. While the company seems to be turning around, its recent financial growth and improving balance sheet have certainly boosted investor sentiment. Bombardier stock has jumped 40% in the last 12 months, notably beating broader markets. It underwent a reverse stock split of 25:1 in July 2022.
What’s behind Bombardier’s surge?
A $6 billion Bombardier is now a pure-play private jet-making company after selling a few key verticals in the last few years. Bankruptcy once seemed unavoidable for it not long ago due to its huge debt pile. However, strong operational performance and changed strategic direction seem to have brought it back to a growth track.
Bombardier generates three-fourths of its total revenues from jet manufacturing, while the rest comes from the aftermarket segment.
The year 2022 brought in handsome growth for Bombardier. In its preliminary fourth quarter of 2022 results, released on January 17, it reported total revenues of US$6.9 billion. That represents a decent 13% increase year over year. It also exceeded the guidance declared by the management earlier in 2022.
Last year, it delivered 123 aircraft, beating its earlier estimate of 120. Apart from revenues, the margin profile also improved from 15% to 19% for the nine months that ended September 30, 2022. Margins expanded due to high-margin products and the successful execution of cost-reduction strategies. How its margins take shape amid adamant inflation this year will also have to be seen.
For the year 2022, it expects free cash flows of US$735 million. Despite these positives, Bombardier remains a net-loss-making company on an annual basis. The company will release its fourth-quarter (Q4) 2022 earnings on February 9, 2023.
Is Bombardier really turning around?
Deleveraging efforts have made Bombardier’s balance sheet notably stronger of late. At the end of Q3 2022, it had net debt of $5.18 billion, which is down from over $8.5 billion at the end of 2020. Investors might expect its debt repayments to continue with potential free cash flow growth.
BBD.B stock is currently trading one times its sales and offers a free cash flow yield of 4%. It is trading at a forward price-to-earnings multiple of 39, based on analysts’ estimates. The stock seems to have gone too far, too soon. A hint of slowing sectoral growth could push the stock notably lower in the short to medium term.
The business jet market has been flourishing since mid-2020, as passenger airlines were grounded amid curbs. However, a high correlation with business cycles makes Bombardier a risky bet. Upcoming recession fears and high competition in the sector could hinder its growth.
The Foolish takeaway
The changed direction to business jet-making looks to be working well for Bombardier. Despite its losses, improving margin profile and strengthening its balance sheet could make its turnaround a compelling growth story. Further deleveraging will likely lower its interest expenses, positively impacting its bottom line.
Improving financials seem already priced in the stock, justifying Bombardier’s rally since last year. It will be important to watch how its quarterly earnings growth plays out if the macroeconomic picture deteriorates in 2023.