Bombardier (TSX:BBD.B) stock jumped more than 25% year to date, outperforming the TSX Composite Index, which corrected 5% after a brief recovery earlier this year. The business jet maker is a contrarian stock moving against the market as its turnaround story materializes. The debt-laden Bombardier expects to witness positive earnings per share in the coming years after years of losses from a failed passenger aircraft.
Three things are driving Bombardier’s stock price:
- Growing business jet orders
- Expansion of aftermarket services
- Accelerated debt repayment
Bombardier’s increased 2025 guidance drove the stock up 16.5% in a week, reversing the 17.5% bear market dip caused by the U.S. banking crisis. This performance shows that Bombardier stock is not immune to the macroeconomic environment, but company-specific factors are driving growth for the mid-cap ($5.6 billion market cap) stock.
Bombardier’s growing business jet orders
Bombardier saw an increase in business jet orders in 2022. Its order backlog rose by 21% to $14.8 billion from $12.2 billion in 2021. The orders jumped due to lower pre-owned business jets and increased usage of business jets.
Bombardier brought its Challenger 3500 jet into service in September 2022 and launched its Defense business wherein it offers special-mission Challenger and Global business jets. The company has introduced the Global 8000 aircraft, which it expects to enter into service in 2025.
A well-thought out product roadmap and its successful implementation are the cornerstones of a turnaround company. Bombardier expects to increase its aircraft deliveries from 123 in 2022 to 138 in 2023 and 150 in 2025.
Bombardier’s aftermarket services
An important part of Bombardier’s turnaround plan is increasing focus on aftermarket maintenance services. Why is it important? Revenue from aircraft delivery depends on the demand environment. But maintenance costs increase depending on the aircraft’s age and usage, bringing in regular cash flow.
Last year, Bombardier opened several new service centres across different countries. With this, the company expects to capture aftermarket service contracts for 50% of its aircraft by 2025 from 41% in 2022. The aftermarket service segment will grow in line with its business jet orders.
Accelerated debt repayment
While the aircraft orders and aftermarket services are operational angles, the key driver of Bombardier’s stock price is its accelerated debt repayment. A $10 billion debt pile before 2020 pushed the company towards bankruptcy. Its past attempts to reduce debt failed. But the change in the CEO in 2020 set the plane maker on the path to recovery.
The company sold all its capital-heavy businesses and used that money to reduce its debt by 45%. At the end of 2022, its long-term debt stood at $5.9 billion, with no debt maturities up to March 2025. It aims to reduce its adjusted net debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to 2.0x–2.5x.
Given its 2025 Adjusted EBITDA guidance of $1.6 billion, the company might reduce its net debt by another $500 million to $1 billion to achieve its guided ratio. Lower debt leaves more earnings per share for shareholders.
Is Bombardier’s growth sustainable?
Bombardier stock is currently in a high-growth phase, beating its target as part of recovery from near bankruptcy. It is trading closer to its 52-week high. Is this growth sustainable, and is now a good time to buy the stock?
Turnaround stocks have the potential to give decent capital appreciation for three to five years, and this is the first year for Bombardier.
While rising interest rates and slowing business activity play a role in Bombardier’s outlook, the business jet landscape is changing. The increasing number of high-net-worth individuals and growing desire for safety, convenience, and privacy are driving business jet demand. Business aviation is becoming accessible with the evolution of new ownership models like fractional and charter businesses. Then, there is the retirement of older and introduction of more fuel-efficient models.
Instead of buying the stock at its high, add it to your watch list and buy it in the next bear momentum market.
