The TSX Composite Index reversed its early September rally after the inflation numbers didn’t come out as expected (August inflation surged 4%). The fear of a recession kept the stock market bearish throughout 2023. The slowing world economy is also pulling down stock prices of discretionary products like business jets. One of the leading pure-play business jet makers Bombardier’s (TSX: BBD.B) stock fell over 11% this year. It is the first time since November 2022 the stock fell below $47.
Is the current dip a good time to buy the stock or a sign of long-term decline?
The bull case of Bombardier
Bombardier turned around the company from making planes and trains to making just business jets. It was the only profitable business of Bombardier when all other businesses made losses.
The current dip has nothing to do with Bombardier’s fundamentals. It is still on track to deliver 138 aircraft by year-end, which means 87 deliveries are coming in the second half. It is also seeing a pickup in the aftermarket revenue. The company is enjoying a turnaround as demand grows from high-net-worth individuals for business jets.
The growing number of wealthy people, especially in emerging markets, boosted business jet demand. These people are unaffected by inflation. So far, demand is in line with expectations. Bombardier has an order book of US$14.8 billion, enough to keep the plane maker busy for over two years. And it has no significant debt maturities till 2025.
A strong order book, strong demand, no immediate debt obligations, and stability of aftermarket revenue are the bull cases that could push Bombardier stock above $55 and keep it at that level.
The bear case of Bombardier
However, Bombardier is not immune to a recession. Companies and wealthy individuals reduce their costs if the global economy is weak. The growth in business jet demand in 2022 due to the lower number of pre-owned business jets and lifting of travel restrictions is normalizing. The usage of business jets decreased in the United States and Europe but increased in Asia Pacific in 2023.
Rising interest rates and market uncertainty could create short-term weakness in order levels, but the long-term growth trend is expected to stay. Next year could be challenging for the entire industry as economic weakness could delay order deliveries. Thus, Bombardier’s stock has been on a decline.
Should you buy the stock at the dip?
Almost all companies take a hit during economic weakness. But only those with strong balance sheets, long-term demand growth, and sufficient liquidity can withstand a recession. Bombardier is a company that has sustained the 2008 Financial Crisis and pandemic despite a debt-heavy balance sheet.
It is now in a much better position to withstand a downturn and rally in an economic recovery. The stock may not provide 650% or a 200% capital appreciation as it did during the pandemic recovery and 2022 recovery. But it has the potential to grow more than 50% in a recovery rally.
What makes me optimistic is its 2025 target of US$9 billion in revenue and US$900 million in free cash flow. A recession could stretch the timeline for achieving this target. But the stock can see a long-term uptrend.
Investing tip
While Bombardier is a good stock to buy for generating wealth, keep only 5-8% of your portfolio in this stock. Even though the tide is in Bombardier’s favour, it is a risky stock in the short term.
BBD is a mid-cap stock with a beta of 2.9. Beta is a measure of volatility against the market beta of 1. The higher the beta, the more volatile the stock, and Bombardier’s beta shows it is almost three times more volatile than the market.
Hence, it is better to diversify your portfolio with some large-cap growth and dividend stocks in relatively stable sectors like energy and consumer goods.
