Is Bombardier a Buy? No way, says Lorne Steinberg

Shares of Bombardier (Bombardier Stock Quote, Chart, News, Analysts, Financials TSX:BBD.B) may be popping but investors would be wise to steer clear of the troubled transportation company, says portfolio manager Lorne Steinberg.

Bombardier was up almost 27 per cent last week as the Canadian plane and train maker announced $2.3 billion in funding from the British government to invest in its Derbyshire, England, factory which won a contract to build monorail trains in Cairo.

“The Cairo Monorail export win, against international competition, shows that that the UK rail sector can fight and win in key growth markets such as sustainable transport,” said Matt Byrne, president of Bombardier Transportation, UK and Ireland, in a press release. “This is the first UK export since our Derby-built trains were exported to South Africa for the Gautrain project in 2008. Thanks to UK Export Finance’s support and those working in Embassies across North Africa, this new deal will bring sustainable benefits to Egypt and create job opportunities in the UK.”

Bombardier also announced last week a service contract for its 50-per-cent owned joint venture Bombardier Sifang (Qingdao) Transportation from China State Railway to give maintenance service for 280 high-speed train cars (32 trains) made by Bombardier, with the deal valued at about US$192 million. As well, Bombardier announced a new order from Italy’s GTS Rail for three more Bombardier locomotives to be built at the company’s Vado Ligure site in Italy.

The deals come as Bombardier gets set to shed its railway division, selling it to Alstom in a $8.4-billion deal likely to close by the end of January. The major divestment, which received final regulatory approvals last month, will boost Alstom into being the second-largest manufacturer of rolling stock on the planet behind China’s CRRC, while Bombardier further shrinks its portfolio and with a focus on its business jets program. Bombardier said the sale of Bombardier Transportation to Alstom will give it about $4 billion to help pay down debt.

But even with a pared down business, Bombardier is still a mess of a company, says Steinberg, president of Lorne Steinberg Wealth Management, who spoke on BNN Bloomberg on Friday.

“We have not been a fan of Bombardier for many, many years,” Steinberg said. “They always had way too much debt for their business model and they got themselves in trouble — and before, at least they were a more diversified company.”

“They had to get rid of their metro car transportation division and they’re now in a very narrow place with their jets business, they still have a lot of debt,” he said. “This is just not the kind of company we would be attracted to. It’s a really risky bet.”

On the plane side of the equation, Bombardier took a big step in 2018 when it sold a little over half of its C-Series plane program to competitor Airbus in a bid to keep from going bankrupt, following it up with the sale of its CRJ program in 2019 to Mitsubishi Heavy Industries. Bombardier then announced last year the sale to Airbus of its remaining stake in the C-Series, now dubbed the A220 jetliner program.

Bombardier —along with Canadian federal and Quebec governments— had invested billions in the C-Series program, with its sale to Airbus seen by many as a great loss for Canadian manufacturing let alone for now much smaller Bombardier.

Steinberg said the C-Series sale was a negative.

“That really put them in a massive hole,” Steinberg said.

Bombardier’s share price had been dropping for a couple of year before really falling off a cliff with the COVID-19 pandemic last February. BBD finished 2019 down 13 per cent and ended 2020 down a further 75 per cent, spending much of last year around the $0.50 mark.

But with its trimmed down business, Bombardier is trying to set itself up as a more financially stable outfit, in President and CEO Éric Martel’s words, a “leaner, focused business aviation company.”

“In the third quarter [2020], we made solid progress on each of [our] priorities,” said Martel, speaking in the company’s third quarter press release on November 3, 2020. “We secured additional liquidity with a new billion dollar senior secured credit facility, we kept our divestitures moving forward as planned, and with deliveries ramping up across the businesses, we are still targeting break-even free-cash-flow for the second half of the year, assuming operations remain uninterrupted by the pandemic.”

For the Q3, Bombardier delivered total revenues of $3.5 billion, down five per cent year-over-year, while its Business Aircraft revenues grew ten per cent to $1.2 billion. Total adjusted EBITDA was $176 million and pro-forma liquidity stood at $3.0 billion at the end of the quarter including $1.9 billion in cash on hand and $275 million from the recent sale of its aerostructures business.