The last couple of months have been rough on shareholders of Bombardier Inc. (Quote, Chart TSX:BBD.B), but does the recent dip make for a buying opportunity? Not likely, says portfolio manager Lorne Steinberg, who cautions that investors should stay clear until the company’s debt profile looks better.
Continuing a slide that began in early July, shares of Bombardier dropped two and a half per cent in Tuesday’s trading. The stock remains up a full 39 per cent for the year, however, a sign of investor support in the company’s five-year turnaround, one which will see Montreal-based Bombardier through to 2020.
But the hill to climb is still steep says Steinberg, president of Lorne Steinberg Wealth Management, who spoke to BNN Bloomberg on investing in BBD.
“Bombardier still has way too much debt, as they’ve had for a very many years,” says Steinberg. “I have to say that with these recent new management changes, it looks the CEO has done a pretty good job at improving operations. Aircraft is in a very good place right now, they’ve raised some cash through a building sale, so it’s probably not a bad time in the cycle for Bombardier.”
“But the only way that this company is going to create long-term value is by figuring out how they’re going to get their debt down and generate some free cash flow,” he says.
Bombardier’s financial woes came to light into sharp focus a few years back when the company produced negative free cash flow of US$4 billion between 2014 and 2016 and racked up roughly US$9 billion in debt.
Last month, its second quarter earnings showed EBTIDA of US$336 million, up from US$313 million a year ago, and a revenue increase of three per cent to US$4.26 billion. Importantly, its cash burn was cut to $370 million over the second quarter, beating expectations and potentially heading the company towards break-even by the end of the year.
“We would not be buying Bombardier right here,” says Steinberg. “If I held it, I might hold on, as the cycle is still going their way. Transportation division rumours are that it might get sold, spun out or something happening. These things can create value.”