Be wary of a value trap, Bombardier’s a ‘big question mark’

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The freefall in Bombardier shares naturally has bargain hunters curious.

A torrent of negative developments has the company's stock trading at its lowest level since 1993, creating the opportunity to pick up shares in a storied Canadian manufacturer at a time of acute pessimism.

But there is not yet a clear path to recovery for investors to put their money on.

"You can't tell how deep this valley is," said Jeff Young, chief investment officer of NexGen Financial, calling the stock "too broken to buy."

"It's going to depend on the news flow."

The news flow has not been favourable for most of the past seven years.

The financial crisis and global recession in 2008 saw spending on corporate jets and commercial aircraft slashed, drawing Bombardier's stock into a tailspin from which it never fully recovered.

Investors sold off the stock again in 2011 over a string of disappointments, including concerns about the company's C Series passenger jet program.

The market lost confidence in the stock again last January, when Bombardier suspended development of its Learjet 85, announced a leadership shakeup and cancelled its dividend.

Then in late July, Bombardier delayed the expected delivery of its Global 7000 business jet by two years, amid weakening global demand.

While the company has had to raise more than $3-billion in debt and equity so far this year, it is burning through cash at a frantic pace – $1.6-billion in the first half of 2015, which represents the highest rate of cash burn in Bombardier's history, BMO Nesbitt Burns said in a note.

The company still has cash, but could face another liquidity crunch in a couple of years, according to a recent note by Macquarie Capital Markets analyst Konark Gupta. A plan to go public with a minority stake of the company's transportation unit won't help much, Mr. Gupta said. "We don't think the market should rely on possible upside from the potential [initial public offering]."

Weakness in the business jet segment, meanwhile, will elevate the company's debt load, which is already "very high" at $9.7-billion, according to a Moody's Investors Service note issued last week. Bombardier's key debt ratio could increase to 8.5 times earnings before interest, taxes, depreciation and amortization next year, Moody's said.

The agency downgraded Bombardier's debt and raised the probability of default.

All of which have weighed forcefully on Bombardier shares, which dropped to a 22-year-low closing price of $1.52 on Friday.

Investors contemplating an entry point should be leery of a value trap, said Manash Goswami, a portfolio manager at First Asset Investment Management. "We need to see order flow. We need to see people actually buying these planes. Until they do, there's a big question mark."

It's conceivable that the shares are fairly valued at the current range, he said. "You need to have a sight line to the catalyst that's going to bring value." The company has not generated a new firm C Series order in almost a year, while existing orders represent a customer base of "iffy quality," according to a new report by Leeham Co.

Of the nearly 200 C Series aircraft scheduled for delivery from 2016 to 2018, more than half fall within Leeham's yellow-to-red risk assessment.

And the company's fate currently hinges on the success of the C Series. "They're going to have to knock the C Series right out of the park," said Patrick Horan, a principal at Agilith Capital, which sold its shares of Bombardier after the company's earnings call in late July.

"They need higher margins to get free cash flow up. I'm not hearing that at all," Mr. Horan said. "They're focusing on marketing and sales, and that's more of the same."