Here’s why I don’t like Bombardier: Brian Madden

Here’s a Canadian conundrum for you: Bombardier (Bombardier  Stock Quote, Chart, News, Analysts, Financials TSX:BBD.B) is up a tonne over the past 12 months and the newly streamlined company is now making headlines with new plane orders and deliveries. But at a buck and change, is the stock a buy here?

Not at all, says Brian Madden of Goodreid Investment Counsel, who says you shouldn’t be touching Bombardier with a ten-foot pole.

“This was a growth-scorcher throughout the late 80s and 90s on the back of the Canada regional jet program and turboprops,” said Madden, senior vice president at Goodreid, speaking on BNN Bloomberg on Wednesday. “But the C Series program which is now divested was a disaster, while the transportation unit struggled for years and they divested that.”

“When you’ve got a company that peaked in share price terms about $25 in the year 2000 then declined steadily for 20 years, you have to ask yourself about the leadership and the board the governance. And for that reason we don’t like it,” Madden said.

Bombardier announced at the end of June its largest business jet order of the year, a ten-aircraft contract worth $451.8 million to an existing customer. The announcement was welcome news for Bombardier fans who have seen the company sell off business units left and right in recent years, from its C Series plane program to Airbus and its CRJ program to Mitsubishi to the shedding of its train-making unit to Alstom, a deal that was completed earlier this year.

All that effort has helped knock down Bombardier’s debt which still stands at $10 billion, and the company is predicting to be at positive free cash flow within a year or so. But with the uncertainties of both the COVID-19 pandemic and the economic fortunes of the wealthy few, a lot has to go right for Bombardier as it moves forward with all of its eggs in the one business jets basket.

“When you’ve got a company that peaked in share price terms about $25 in the year 2000 then declined steadily for 20 years, you have to ask yourself about the leadership and the board the governance. And for that reason we don’t like it,” Madden said.

“I think the days of distress are probably behind them,” Madden said. “The balance sheet is still kind of shaky even after divesting all those big units and the business jet market is pretty hot with global elites wanting to fly on private planes rather than get back on commercial carriers.”

“But that comes and goes, and so the cycles are going to be hot and heavy one year and when it’s good, it’s great [but] when it’s bad, it’s dreadful,” he said. “And I worry about the balance sheet and the next downturn in demand for these admittedly luxury purchases.”

“It’s not a company that we would buy. You really have to get down to the roots of the governance behind Bombardier, which we don’t like — the multi voting structure and family control,” Madden said.

By the numbers, Bombardier’s latest quarter — the company’s first quarter 2021, delivered in May — generated revenues of $1.341 billion compared to a 2020 Q1 revenue, restated and adjusted for the sale of its Transportation unit, of $1.522 billion. Adjusted EBITDA was reported at $123 million compared to a restated $86 million a year earlier. Free cash flow from continuing operations stood at negative $405 million compared to negative $762 million a year earlier.

So far in 2021, BBD’s share price is up 190 per cent, but at $1.39 per share, the stock is still off the $2.00 it traded for about two years ago and the $5.00 it was at three years ago.

In the end, Madden says investors need to put patriotism and other concerns aside and take a good hard look at Bombardier’s track record.

“I recognize this is kind of an unpopular thing to say,” Madden said. “This is an iconic company in Quebec and, you know, you hear a lot of talk about stakeholder capitalism and about companies that are managed for more than just the shareholders, and I freely concede that Bombardier over the years has created tremendous value in the province of Quebec and beyond for workers, suppliers, customers and so on.”

“But at the end of the day, as stewards of capital and as investment managers, if a company can’t create value for all those other external stakeholders and have some left over for its shareholders then there’s no reason to buy it,” he said.

Last month, Bombardier announced the sale of its first two Global 7500 business jets to Canadian customers, as the company continues to ramp up production of what it calls the largest, most luxurious and longest range business jet ever built.

“Our Global 7500 aircraft continues to redefine long-distance business travel,” said Peter Likoray, Senior Vice President, Sales, New Aircraft, in a June 30 press release. “The superior performance, luxurious in-flight experience and signature smooth ride of this aircraft will open a new world of long-range travel possibilities for Canadian customers, as it has done elsewhere in the world.”