Bombardier (TSX: BBD.B) stock made a comeback with a 333% return in three years from December 2020 to December 2023. You may think you missed the turnaround rally and the stock is too expensive to buy at the $50 price point. However, a smart investor knows that historical returns do not guarantee a stock’s future performance. Here, I will tell you three things about Bombardier stock that could make $50 look like a bargain in front of what lies ahead for this stock.
Bombardier’s stock valuation
A stock price is always about a company’s future earnings potential. When you look at Bombardier stock trading at 0.48 times its price-to-sales ratio, you know that the market has undervalued its revenue potential. The ratio states investors are paying $0.48 for every $1 sales per share.
During its turnaround year (2022), Bombardier’s revenue grew 23% to US$6.9 billion. The company has set a goal of achieving US$9 billion in revenue in 2025, growing at a 9% compounded annual rate from 2022. Bombardier has earned $5 billion in revenue in the nine months of 2023 by delivering 82 aircraft and providing after-market services. It is on track to deliver 56 more aircraft in the fourth quarter, which means it will report high revenue (probably $3 billion).
When Bombardier releases its earnings in early February, its stock could soar significantly.
Bombardier’s earnings-growth drivers
As I said before, it is not about past performance but the future earnings potential. And for Bombardier, the next earnings growth driver is its latest Challenger 3500 mid-sized jet. The Challenger series has been the most delivered business jet family of Bombardier. The company delivered its first Challenger 3500 jet in Turkey and has received an order for 12 more worth US$326.4 million.
Moreover, Bombardier has tweaked its jets to cater to the defence sector and expects to earn US$1 billion from this segment. As more jets are in the air, it creates opportunities for its after-market services. This portfolio mix could help Bombardier boost its earnings in the coming years.
Bombardier’s balance sheet
While there is significant upside for the stock, what about the downside? The fear of a global economic slowdown could hurt demand for business jets. However, the company is well prepared for a weak year with over US$1 billion in liquidity and no debts maturing until 2025. The next debt maturity of US$1.3 billion is in 2026. Bombardier’s free cash flow guidance of $900 million in 2025 would be sufficient to prepay a large portion of the 2026 debt maturity if the need arises. A strong balance sheet like this has prepared Bombardier for the worst.
How can investors benefit from this stock?
The growth momentum has just started for Bombardier stock. Now is a good time to buy the stock while it trades closer to $50. It has a bright outlook for the next two years. Do not worry about the short-term volatility. Instead, keep buying at lows and reduce the average cost per share. Because once the rally begins, this stock has the potential to grow your money by 30-50% in a short span.
