A trade mission can produce photographs almost immediately. Aircraft revenue is considerably less cooperative.
First comes the relationship, then perhaps an order, then manufacturing, and then delivery. Only after all that does the cash become particularly interesting.
Team Canada heads to India October 12 through 17, with aerospace and space among the priority sectors. That doesn’t give any Canadian aerospace company an order. That said, it does put an expanding aviation market directly in front of businesses already capable of serving it.
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Planes keep spending after delivery
The best part of selling an aircraft isn’t necessarily selling it once. Jets require maintenance, replacement parts, inspections and upgrades throughout their operating lives. Build a large installed fleet and services can create a recurring revenue stream alongside much lumpier aircraft deliveries.
That distinction is important for Bombardier (TSX: BBD.B). Bombardier manufactures Challenger and Global business jets, but it has spent years expanding its services network as well. The latest numbers suggest that strategy is working.
Second-quarter revenue reached US$2.2 billion. Services contributed US$674 million, up 14% year over year. That means roughly 31% of quarterly revenue came from looking after aircraft rather than building another one. Meanwhile, backlog reached US$21.8 billion.
Considerations
Backlog isn’t revenue sitting patiently in a bank account. Jets still need to be produced and delivered, customers need to pay and orders can change. Still, it gives Bombardier considerable future work before any India mission produces something new.
The company is also expanding its Singapore service centre, increasing its ability to support customers across Asia. That’s a much better reason for Canadians buying stocks in Canada to watch India than simply assuming a handshake becomes a Global jet order.
Even so, debt has historically been the ugly part of Bombardier’s story. That picture has improved considerably. The company reduced debt by more than US$1.1 billion year to date, bringing adjusted net debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) down to 1.6 times. Its next debt maturity is now November 2030.
Where value stands
Higher interest rates therefore don’t immediately slam the company into a giant refinancing wall. At roughly $308.34, Bombardier shares sit about 18% below their $377.77 52-week high.
That doesn’t automatically make them cheap. Business-jet demand is cyclical, and an economic slowdown can make a multimillion-dollar aircraft surprisingly easy to postpone.
What’s more, Bombardier also pays no common dividend, so the investment depends on higher cash flow and business value rather than income today. A position inside a Tax-Free Savings Account (TFSA) could shelter future gains, but I’d keep the position manageable for now.
Bottom line
India could eventually become another customer-growth opportunity for Bombardier. Yet that said, I wouldn’t pay for an order that doesn’t exist yet.
The existing business already gives investors plenty to work with. The US$21.8 billion of backlog, growing services revenue, and a dramatically improved debt schedule are all points to consider.
If the India mission eventually adds profitable orders, excellent. Bombardier no longer needs the diplomatic trip to provide the entire investment thesis.
