In an incredible reversal of fortunes, Bombardier (TSX: BBD.B) has come back to life in the last few years. Bombardier’s stock price has risen 625% to over $50 since its 2020 lows, and the business has come back to life.
The most pressing question left for investors to ponder is whether it’s too late to buy. Let’s explore.
Bombardier stock is still attractive
The company’s transformation in recent years has been nothing short of spectacular, but we want to make sure that the stock hasn’t gotten ahead of itself. Bombardier stock currently trades at 14 times this year’s expected earnings and 12 times next year’s expected earnings. With earnings expected to grow 390% this year and 17% in 2024, it’s clear to me that the stock is still attractive.
On top of looking at earnings growth, however, we can also look at some other metrics to inform our decision. For example, Bombardier has been rapidly paying down debt. In fact, the company expects its net debt-to-earnings before interest, taxes, depreciation, and amortization ratio to fall below four times at the end of this year. This effectively reduces the stock’s risk, allowing it to command higher multiples.
Another thing to consider when trying to determine if Bombardier stock’s valuation is attractive is by looking at the company’s cash flow. In this regard, Bombardier also ranks well. The company’s full-year 2023 free cash flow guidance is $250 million. This is yet another fact that reduces the risk of Bombardier stock and allows it to command higher multiples.
The business has transformed into a reliable, sustainable one
Gone are the days of missed deliveries, inefficient operations, and mistakes. This new management team at Bombardier has effectively turned things around rather rapidly. It has certainly been a better performance than many of us expected.
In Bombardier’s latest quarter, revenue increased 28%, in yet another quarter of better-than-expected results. Essentially, the company has become one that we can count on. From its backlog, which is 18 to 24 months’ worth of orders, and the level of activity that Bombardier is seeing, this strength appears sustainable.
The one thing that many investors question is whether this demand is sustainable. The global economy is at risk, and this leaves us with doubts as to how the demand environment will look in the next few years. To this, Bombardier says that they have a clear line of sight and that the demand environment can remain strong even in the face of economic trouble. Also, they are committed to remaining disciplined. This means not being stuck with inventory and remaining on top of supply chain stresses.
Bombardier will very likely beat its Q4 guidance
That seems like a given, considering the momentum that Bombardier reported along with its very strong third-quarter result. This is good. Essentially, the demand for new aircraft is strong. Also, there’s a lot of support for Bombardier beyond this. The service business, for example, is thriving as aircraft are aging and flying hours have been increasing. Both of these factors mean more maintenance work.
Looking further ahead, free cash flow per share is expected to be $10 in 2024. This compares very favourably to Bombardier’s stock price of $50. It’s backed by Bombardier’s strong backlog of $14.7 billion, as well as a book-to-bill of 1.1. This means that more orders are being received than filled. It’s an indication of strong demand, and it bodes well for Bombardier. The company continues to see strong activity from large fleet operators, corporations, and individuals.
The bottom line
Bombardier stock has certainly been one of the star performers in the last few years. Today, it has transformed into a picture of reliability. The company is in a cyclical, capital-intensive business. This has not changed. But I think that the demand momentum and Bombardier’s shift toward operational excellence mean that it’s not too late to buy Bombardier stock.
