Bombardier is a disaster waiting to happen, this investor says

As investors, it can be useful to once in a while sift through a bunch of perpetually unloved stocks in search of that one diamond in the rough, and while a now slimmed-down Bombardier (Bombardier Stock Quote, Chart, News, Analysts, Financials TSX:BBD.B) might fit the bill as unloved, questions remain not only about its new iteration as a pure-play business jet company but the unwieldy debt load hanging around its neck. For Chris Blumas, portfolio manager at Raymond James Investment Counsel, those issues should be enough for you to toss Bombardier back on the pile.

“What Bombardier has done is they’ve focused just on the aircraft market now, so the business is a lot simpler than it used to be,” said Blumas, speaking on BNN Bloomberg on Tuesday.

“[But] the two problems that I have with Bombardier are the business economics and the balance sheet. They’re still burning cash flow — they went through a really really big capex program that’s winding off this year, so the outlook for cash flow going up is quite positive, but they still need to get their units out to drive profitability and the balance sheet is still not investment grade,” he said.

If you like disaster movies, Bombardier’s development in recent years —the past couple of decades, really— has been a triple bill of excitement, with the company spinning out early in the 2000s its original snowmobile-making business, then just a few years ago shedding its C-Series plane program to Airbus, followed by the sale of its aerospace parts manufacturing business in 2019, the dumping of its CRJ plane program to Mitsubishi Heavy Industries also in 2019 and then, earlier this year, divesting the entirety of its train business to Alstom.

All those moves have left Bombardier with less debt and a whittled down business focusing on its Global and Challenger series of business jets.

“We continue to make strong progress on each of our strategic priorities: maturing the Global 7500 aircraft program, delivering on our productivity initiative, executing our aftermarket growth strategy and deleveraging our balance sheet – setting the foundation for a more resilient and profitable business,” said Bombardier President and CEO Éric Martel in the company’s first quarter 2021 press release, delivered in early May.

Bombardier’s latest move to right the ship was a US$260-million private placement closed last moth, debt purchased at 7.45 per cent with senior notes due in 2034. The company was in a dispute with one of its bondholders who claimed that recent divestitures of assets violate covenants on some of its debt, but the new funding round has apparently settled the problem through amendments to the conditions on the senior notes.

But Blumas says the future could bode well for the new Bombardier but with so much uncertainty as to how they’ll get there, investors should probably go for less risky options.

“They did a recent debt issue for a five-year term, and they had to raise that at about seven and a half percent,” Blumas said. “In terms of my lens that I use to screen stocks and what I’m looking for, right off the bat the business economics wouldn’t meet my hurdle and the balance sheet wouldn’t meet my hurdle.”

“That said, if demand for private air travel increases and demand for business jets increases you could see a path down the road over the next three to five years where cash flow is a lot stronger,” he said.

“But with a balance sheet like they’ve got, you can also see a pretty bad downside scenario, as well, so in this case I think it’s just a bit too speculative and it’s one that I would steer clear of,” Blumas said.

Bombardier delivered its latest financial report in May where the company’s first quarter 2021 featured revenue down 12 per cent year-over-year to $1.341 billion, with adjusted EBITDA coming in at $123 million compared to $86 million a year earlier. The company’s business jet revenues grew by 18 per cent from 2019’s Q1, spurred by deliveries of 26 of the company’s Global 7500 jet.

The company said the worst of the pandemic’s impact on its business is now behind it, saying it will deliver between 110 and 120 aircraft this year. Bombardier said its reaffirmed aims for the year include diversifying its revenue mix through growth in aftermarket services, cost-cutting in Global 7500 production and obtaining $400 million in recurring savings by 2023.

“Through these actions, we work on transforming Bombardier into a more predictable, profitable and resilient company,” said Martel in a press release.

Bombardier’s share price went from $1.93 to $0.48 per share over 2020, while so far in 2021 the stock is up 125 per cent.