So far, it’s been a “meh” reaction from the market on Bombardier’s (Bombardier Stock Quote, Chart TSX:BBD.B) sale of its CRJ Series aircraft division, announced this week in a deal with Mitsubishi for a total of roughly US$750 million.
And while getting rid of that money-losing segment may bode well for the company going forward, there is still too much debt on its plate, says portfolio manager Lorne Steinberg, who argues that investors willing to take a shot at BBD should tread carefully.
Canadian transportation company Bombardier on Tuesday announced the sale of its storied Canadair Regional Jet program to Mitsubishi Heavy Industries for US$550 million in cash and the assumption of about US$ 200 million in debt and other liabilities. The announcement comes as part of the company’s attempts to right the ship by shedding divisions —notably including its CSeries jets a majority stake in which was transferred to Airbus two years ago.
“We are very pleased to announce this agreement, which represents the completion of Bombardier’s aerospace transformation,” Bombardier CEO Alain Bellemare said. “We are confident that [Mitsubishi]’s acquisition of the program is the best solution for airline customers, employees and shareholders. We are committed to ensuring a smooth and orderly transition.”
Bomberdier’s money woes have a history. Between 2014 and 2016, the company grew its negative free cash flow to US$4 billion and accumulated US$9 billion in debt. Over its last reported quarter, BBD went through US$1.04 billion on a free cash flow basis, while revenue dropped by 13 per cent to US$3.52 billion. That was under the consensus estimate of US$3.67 billion.
Steinberg says investors interested in Bombardier bonds, which at the five- and seven-year are yielding about seven per cent, should make sure to diversify.
“We don’t own Bombardier in our high-yield fund but my comment is always going to be the same: don’t buy one high-yield bond,” said Steinberg, CEO of Lorne Steinberg Wealth Management, to BNN Bloomberg on Wednesday. “The reason that companies’ bonds yield six or seven per cent is because it’s clear that they have a fair bit of debt.”
“Bombardier has negative cash flow and they’ve not been able to turn that around for years. Maybe they will going forward, but there’s just a lot of risk in something like that, and you want to have a diversified portfolio,” he says. “Otherwise, you’re just gambling.”
So far in 2019, Bombardier is up 9.9 per cent, while over the past 12 months, the stock is down 56 per cent.