Bombardier Inc. (TSX: BBD.B) has seen it all. Success, failure, and everything in-between. Today, Bombardier’s stock price is rallying big as revenue, backlog, and cash flows are all rising significantly. In fact, it’s up 8% last month, an additional 17% so far in May.
Why is this happening?
Bombardier gets its act together
As a leading global aircraft supplier, Bombardier’s clients include businesses, governments, and airliners, as well as militaries. In the past, the company ran into trouble as it was plagued by missed deliveries, inefficient operations, and financial and operational blunders. This hurt Bombardier’s reputation, and its financial performance alike, sending the stock below $25 in 2016.
But things have changed since then, with a new management team, and a better way of doing business – better control of the supply chain, as well inventory and production. And this transformation is the underlying reason behind Bombardier stock’s stellar performance in April and even in recent years.
First quarter results beat expectations
Bombardier has been executing above expectations in recent years, and this has continued into this year. This is evidenced by Bombardier’s first quarter results released on May 1st. For example, earnings per share (EPS) came in at $0.36 versus expectations that were calling for EPS of $0.28. This led to numerous analyst upgrades and target price increases. With target prices approaching $100, there’s significant upside to Bombardier stock.
In the quarter, Bombardier continued to benefit from strong demand, which showed up in the company’s backlog numbers. In fact, since the beginning of the year, the backlog increased by $700 million, or 5%, to $14.9 billion, as well the book-to-bill rose to 1.6. This means that more orders were 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.
Blue skies ahead for Bombardier
Along with the better-than-expected first quarter, Bombardier is also benefitting from strong cash flows and a strong balance sheet. In 2023, the company’s free cash flow totalled $257 million. Importantly, Bombardier has accrued a significant amount ($12 billion) of losses and tax credits, which will bolster earnings growth for the next few years.
As management said, “Earnings growth is going to translate into almost 100% conversion into free cash flow as we move forward”. The benefit to Bombardier’s bottom line and the value creation from this is significant. The company is considering different options to use this excess free cash flow that they expect in the future.
Possible uses include debt deleveraging and share buybacks, as well as potential mergers and acquisitions. All of these options will create shareholder value.
Diversification offers many benefits
Finally, Bombardier is looking to diversify its revenue base beyond only aircraft production. Therefore, the company is focused on growing its defense, services, and certified-preowned segments. In the services business, for example, there’s a lot of room for growth.
The service business is already thriving as aircraft are aging and flying hours have been increasing. Both of these factors mean more maintenance work. Bombardier is focusing on this segment, which is a lower risk revenue source for the company.
The bottom line
Bombardier’s stock price has rallied significantly recently for the reasons discussed in this article. Yet, the stock still trades at a very attractive valuation of only 11 times 2025 expected EPS.
