Bombardier stock could surprise to the upside, Greg Newman says

There’s a whole passenger train full of reasons why investors should stay away from Bombardier stock (Bombardier Stock Quote, Chart, News TSX:BBD.B), from debt and cash flow problems to concerns about management.

But for those looking to take a flyer on a well-known Canadian name that’s been ground into the dirt, BBD might be worth a look. So says Scotia Wealth’s Greg Newman who thinks that Bombardier has a number of pluses going for it.

After a major run-up in 2018, Bombardier stock has been struggling in 2019, with its share price now down 7.4 per cent year-to-date. The company is in the midst of a multiyear turnaround which has seen it shed a number of business segments in hopes of cutting into its debt and focusing on its more profitable operations.

Last year, Bombardier sold off its much-maligned C Series jet program to Airbus while this year saw it push its regional jet program onto Mitsubishi Aircraft, leaving the company with its Global business aircraft program along with its rail business.

Those moves may pan out long term but the market has yet to appreciate BBD’s efforts, it seems —which actually makes for a potential buying opportunity, says Newman, portfolio manager and director of wealth management at Scotia, who spoke to BNN Bloomberg on Wednesday.

“I’m one of the few people who are actually going to say yes here as a speculative buy,” Newman said. “The bear case is that they have problems with five legacy contracts, they’ve got a levered balance sheet, they’ve got free cash flow issues, lack of free cash flow visibility and, once again, [issues with] management credibility.”

“But think about it: they’ve got two viable, growing, global businesses. They’ve got business jets and they’ve got trains, and they actually make really good products and their margins are starting to improve,” he says.

“It’s a hated name, it’s washed out, it’s under-owned and it’s tax-loss sold here,” Newman says. “[But] importantly, on the last quarter management kept free cash flow guidance intact for 2019, and they’re confident in free cash flow turning around in 2020.”

Bombardier delivered its third quarter financials on October 31, posting revenue down two per cent year-over-year to $3.72 billion and a loss of $91 million or $0.04 per share on an adjusted basis compared to a profit of $149 million or $0.04 per share on an adjusted basis a year ago. Analysts had been expecting a loss of $0.03 per share. (All figures in US dollars unless where noted otherwise.)

At the same time, Bombardier showed an eight per cent organic growth rate over the quarter and is looking to turn profitable very soon, according to CEO Alain Bellemare.

“We continue to make progress driving our turnaround,” said Bellemare, in the company’s third quarter press release on October 31. “At Aviation, the recent certification of our new Global 5500 and Global 6500 aircraft, and the outstanding in-service performance of our new Global 7500, highlight the strength of our business jet franchise. At Transportation, we are turning the corner. We are making steady progress working through our legacy projects, giving us confidence in our ability to deliver stronger financial performance,” Bellemare said.

Newman thinks the selloff on BBD has now been overdone.

“Our analysts believe on a sum-of-the-parts basis that this stock is worth C$2.75,” Newman says.

“I think that this is something that if free cash flow starts to return and the balance sheet starts to improve and it potentially goes into a virtuous cycle where people look and say, ‘Oh, my Bombardier is moving,’ and then they realize that they don’t have it anymore because it’s been tax-loss sold and they’re not comfortable with that and they start buying,” he says.

“It’s not your cleanest thesis and it’s a speculative buy but if you’ve got some speculative capital, I’d own a little bit,” Newman says.

Bombardier closed down two per cent on Wednesday to C$1.88 per share.