Earnings season is a major event in the stock market because it is the time when publicly listed companies release their earnings to the investing public. Moreover, the buy, hold, or sell decision on a stock usually comes after a quarterly earnings report. The stock price spikes or dips depending on the outcome and other business developments.
Bombardier (TSX: BBD.B), a designer, manufacturer, and seller of business and commercial aircraft, reported its first-quarter 2024 results on April 25, 2024. As of this writing, the industrial stock trades at $72.18 per share, or 16.9% higher, since the quarterly report. Market analysts covering the stock recommend a buy rating, but why?
Improving industry
Montreal-based Bombardier is a prominent name in business jets, including maintenance and aftermarket services. The $7.2 billion company has facilities (aerostructure, assembly, and completion) in Canada, the US, and Mexico and caters to clients worldwide.
The buy recommendation for Bombardier stems from the recovering business aviation industry and future outlook, not so much from the financial results. Management expects the industry to remain stable in the short term due to a healthy backlog. As an industry leader, Bombardier is well-positioned to benefit from the rising demand, especially with high-net-worth individuals, in the medium to long term.
From US$32 billion in 2019, the industry backlog has grown 50% to US$48 billion in 2023, notwithstanding macro uncertainty, persistent inflation, and rising geopolitical tension. Internally, Bombardier’s backlog rose 39.3% to US$14.9 billion from 2020 to Q1 2024.
Aircraft deliveries increased 21.1% from 114 in 2020 to 138 in 2023. For this year, target deliveries are between 150 and 155. Bombardier expects its medium and large aircraft to contribute the most to sales and drive revenue growth.
Financial highlights
In the three months ending March 31, 2024, revenue and net income declined 11.8% and 63.6% year over year respectively to US$1.3 billion and US$110 million. Despite the significant drop in the bottom line, the US$700 million increase in the backlog to US$14.9 billion assures hitting the full-year target of 150 to 155 aircraft. Bombardier has met its delivery guidance for three consecutive years.
Other financial goals by 2025 are a repaired balance sheet (2 to 2.5 times net leverage), an industry-leading Adjusted EBITDA margin (18%), and meaningful free cash flow generation (around US$900 million in free cash flow).
Momentum is on its side, made stronger by several growth pathways, including Bombardier Defense and Services. Bombardier’s business jet platforms (five types) are formidable because they can transform into multiple mission types for Special Operations Forces.
The robust demand in the dynamic defence market supports revenue growth (3 to 5 times), while customer services should grow significantly at higher margins. By 2025, the total size of the Bombardier Aftermarket should be about US$4 billion.
Ratings upgrade
Bulls are swarming over Bombardier partly due to the recent Moody’s ratings upgrade. Its Executive Vice President and CFO, Bart Demosky, said the B1 rating means a stable outlook and points to the current business performance following a remarkable turnaround.
The years of mediocrity are over. Performance-wise, the stock’s overall return in 3 years is 207.2%. Bombardier’s growth levers, such as aftermarket expansion, pre-owned market capture, industry-leading portfolio, and Defense growth will sustain earnings and cash generation.
