After climbing steadily over the first half of 2018, Bombardier (Bombardier Stock Quote, Chart: TSX:BBD.B) has been in a tailspin ever since, with a regulatory review, jobs cuts and cash flow concerns all pulling the stock lower in recent weeks. But the selloff is probably overdone by now, says Greg Newman, Senior Wealth Advisor for Scotia Wealth, who argues that BBD’s management has done a fine job executing on the company’s strategy.
Bombardier announced on Wednesday that it would be cutting almost 500 jobs from its Belfast operations as part of an overall restructuring that will involve the trimming of 5,000 jobs and the sale of a number of non-core assets. Those cuts were first announced with BBD’s third quarter report in early November, where CEO and President Alain Bellemare stating that much of the heavy investment component of the company’s multi-year turnaround has now been completed.
“With today’s announcements we have set in motion the next round of actions necessary to unleash the full potential of the Bombardier portfolio,” said Bellemare in a press release. “During the earnings and cash flow building phase of our turnaround, we will continue to be proactive in focusing and streamlining the organization, and disciplined in the allocation of capital. I am very proud of what we have accomplished, and very excited about our future.”
But unimpressive cash flow numbers in its Q3 report and guidance got investors spooked, which was followed up by revelations that Quebec’s financial markets regulator would be looking into transactions connected to the company’s executive compensation plan. Together the events pulled BBD down over 33 per cent since the start of November, although the stock is up four per cent as of midday trading on Thursday.
Newman says that the Bombardier story involves a number of moving pieces, including investor sentiment tied to BBD’s past performance.
“There are two parts to Bombardier, there’s Bombardier before 2015 and Bombardier after 2015,” says Newman to BNN Bloomberg. “The new management team delivered on basically everything that in 2015 they said they were going to do and that’s still on track. [But] Bombardier is a free cash flow story and they severely hiccuped on that last quarter. That cut a deep wound, so all the investor disgust or non-confidence that they had with the prior management team, I think they took it out on this new management team. They took the stock way down.”
The recent selloff is reportedly making it more unlikely that Bombardier will be executing a multi-billion dollar buyback of the Caisse de Depot et Placement du Quebec’s minority stake in Bombardier’s rail segment, which was partially reduced earlier in 2018 from 30 per cent to 27.5 per cent when the company’s rail business had performed well over 2017.
Newman says that BBD looks like a Buy here, although concerns persist.
“If the numbers that Bombardier is telegraphing to the analyst community is correct, then Bombardier is a screaming ‘Buy’ here,” says Newman. “It should be, as long as the global economy stays okay and they execute well. The other thing you have to worry about is that they do have a debt situation — they have a debt to EBITDA ratio of around seven times. It’s going to come down to four or three. They’ve easily got enough cash on hand, $3.5 billion and they’ve got a $9-billion debt to satisfy upcoming liabilities. But in a higher interest rate cycle, one wonders if they’re going to get into trouble that way.”
“I think it’s a very complicated question,” he says.