Here’s why Benj Gallander isn’t buying Bombardier

Investors may be forgiven for thinking that Bombardier’s (TSX:BBD.B) turnaround is ahead of schedule, but there are still a few kinks to work out, says financial advisor Benj Gallander —most glaringly in the form of the plane and train maker’s huge debt load.

Bombardier’s share price jumped after the release of its second quarter 2018 financials yesterday, which featured EBITDA of $336 million, handily beating the Street’s estimate of $287 million. (All figures in US dollars.) Overall revenues grew by three per cent to $4.26 billion for Q2, while its transportation segment saw an 11 per cent growth in revenue to $2.26 billion.

Three years into a five-year turnaround plan, Bombardier’s management says that the company’s margins should keep improving into 2019. Last month, management upped its forecast for consolidated earnings before interest and tax by $100 million to between $900-million and $1-billion.

“We continue to make solid progress executing our turnaround plan and positioning the company for the future,” said CEO Alain Bellemare in a press release. “With our heavy investment cycle largely behind us, our focus is now on ramping-up production and improving operational efficiency to accelerate growth. You can see this in our solid second quarter results.”

So far, BBD has had a great 2018, up a whopping 69 per cent since the beginning of the year. But all that success shouldn’t blind investors to the company’s remaining difficulties, says Gallander.

“At one point they had huge debt problems, major dangers,” Gallander told BNN Bloomberg this week. “They solved the debt problems. I bought in and the stock price went up. Then they went crazy with their C-Series: major problems again.”

“They just reported very good numbers but they still have a huge debt load,” he says. “Before I would buy in I would like to see the debt load come down. I think it has tremendous upside but at the same time, it is fairly risky.”

Bombardier’s development costs for its C-Series airline (now transferred to Airbus) were reported to be in the range of $6 billion, leaving the company with a current debt of about $9 billion.

In its Q2 report, the company highlighted its growing backlog, which features a $34-billion backlog in transportation, with a $14.1 billion backlog in business aircraft and a commercial aircraft segment which has won orders for 16 Q400 aircraft and 35 CRJ Series.

Bombardier reported cash burn of $370 million during the three months ended June 30, which was much better than the expected $532 million. Its adjusted earnings dropped to three cents a share for Q2, also better than the analyst estimate of a loss of one cent per share.