These are confusing times. There is news around the clicking tock on the U.S. debt and looming decision of the government. And then there is a pullback in oil prices as rising interest rates seep into the economy and start reducing demand. All these macro-level uncertainties have put the stock market in correction mode. The TSX Composite Index is down 3.5% since mid-May. Bombardier (TSX:BBD.B) stock moved with the market and fell 5.1%.
The turnaround business jet maker has been in bearish momentum for two months and is trading 25% below its peak. Is the turnaround rally over, or will there be a dip before the big rally?
Why did Bombardier stock fall?
Bombardier’s clients are high-net-worth individuals, corporations, charter services, governments, and defence companies. But a weak economy forces all these parties to cut costs or suspend their capital spending. The first thing that gets affected by cost-cutting is discretionary spending. While Bombardier has not confirmed any weakness, it has not ruled out the possibility of an impact from the macroeconomic environment.
If the U.S. economy plunges into a recession as economists fear, the stock market will fall. Why so?
Remember, governments are clients of Bombardier. When a recession comes, the government budget shifts towards boosting employment and reviving demand for the masses. Hence, spending on business jets might not be its priority. As the economy in question is the American economy, which is embedded with the global economy, a recession here will also affect other governments. A recession could slow Bombardier’s revenue from some governments and corporates.
The magnitude of the impact will depend on how deep the recession is. It is also possible that the federal government will control the recession before it spreads.
Can Bombardier withstand a looming recession?
Bombardier has a vast clientele worldwide. Weakness in one region could be partially offset by strength in another. For instance, Bombardier’s CEO is optimistic about China, where business jet demand was muted while the nation continued to fight Covid 19. Now the economy has reopened and is in recovery mode, which could boost business jet demand.
Moreover, Bombardier’s expansion in aftermarket services couldn’t have come at a better time. These services earn recurring and stable revenue depending on the aircraft usage. This segment will keep revenue flowing even in economic weakness.
The key to withstanding a recession is liquidity and less debt. Bombardier has been accelerating its debt repayment and managed to repay all debt maturities till 2024. The next debt payment of US$$381 million is due in 2025, which the business jet maker will most likely repay this year. An 18–24 month buffer gives it the flexibility to preserve cash and reinvest in the business.
Is Bombardier stock a buy on the dip?
Bombardier’s company fundamentals are on a growth trajectory. It is ramping up production of its latest Global 7500 aircraft. Volume production and aftermarket services could positively contribute to Bombardier’s profits.
Moreover, both S&P Global Ratings and Moody’s have upgraded Bombardier’s credit to investment grade after looking at its strong execution, successful deleveraging, and stability in order backlog. This rating upgrade can help Bombardier restructure its more than US$3 billion debt maturing in 2026–2027 at favourable interest rates.
Bombardier is a company that can thrive in a recession with its US$1.9 billion liquidity and return to high growth as the economy recovers. This stock is a buy on the current dip. But I believe there is more downside for the stock amid market uncertainty.
How to invest in Bombardier
In such a volatile market, investing small monthly amounts is best as the stock moves differently every month or two. Look at the Relative Strength Index (RSI), which measures the market momentum. If the RSI is below 40, the stock is oversold, and it is time to buy.
You can buy two to five stocks of Bombardier now for less than $300. If the market dips, you can buy more shares of Bombardier at a heavy discount. But set a limit to your buying. Don’t invest over 5% of your portfolio in this mid-cap growth stock. Diversify across sectors and invest in gold to hedge your portfolio against a recession.