Bombardier Inc. is back in the dumps, but the stock looks like a deal.
After rallying to a seven-year high in mid-July, the share price has slumped about 40 per cent. One of the hottest stocks in the S&P/TSX Composite Index midway through the year, with a gain of 79 per cent between January and July, Bombardier’s year-to-date gain has shrivelled to just 7 per cent.
Why has the plane and train maker’s recovery stalled?
Bombardier’s sharp decline follows a volatile stretch for the broader market, at a time when investors are growing concerned about rising interest rates, trade tariffs, peak earnings and slowing global economic activity.
Bombardier is exposed to all of these concerns.
It has also been hemorrhaging cash for most of the past decade as it struggled to develop its C Series aircraft (now majority owned by Europe’s Airbus and branded A220). And it faces the prospect of stronger competition from rival Embraer SA after Boeing Co. struck a deal to take a controlling stake in the Brazilian company’s commercial-aircraft division. The deal was announced in July, the same month that Bombardier’s rally began to sputter.
Investors likely saw Bombardier as a risky asset, to be jettisoned when global markets tumbled last month.
Still, many analysts believe that Bombardier has been unfairly punished, given that the stock’s sharp reversal was not driven by any company-specific news. Their optimism suggests that the stock should rebound when volatility in the broader market settles down, if not sooner.
They argue that the global market for business jets is improving after a prolonged struggle in the wake of the financial crisis. Now, the number of new orders is outpacing the number of deliveries.
At the same time, the inventory of used aircraft is falling, lifting demand for new planes. And customer sentiment, according to JetNet iQ, a market research firm, is at a multiyear high.
Steve Hansen, an analyst at Raymond James, noted that activity within Bombardier’s business aircraft unit supports this upbeat outlook. It has delivered 96 business jets in the first three quarters of the year, putting it on track to meet guidance of 135 deliveries in the current fiscal year. Its backlog grew to orders worth US$14.3-billion at the end of the third quarter.
Bombardier’s new plane, the Global 7500, could bolster demand. The long-range business aircraft that can fly non-stop from New York to Hong Kong, received Transport Canada certification in late September, and Bombardier expects certification from the United States and Europe will follow.
NetJets Inc., the chartered jet-ownership company owned by Warren Buffett’s Berkshire Hathaway, is expecting its first delivery of 20 Global 7500 planes in 2021.
“Positioned to be the largest, most luxurious, longest-range [business] jet on the market, we view this certification as a critical step toward Bombardier’s objective to: a) reach free cash flow (FCF) break even by year-end − a critical milestone, in our view; and b) drive top-line growth, FCF generation, and long-awaited deleveraging through 2020,” Mr. Hansen said in a note last week.
Analysts believe that Bombardier’s transportation unit, which makes trains, offers another reason to stick with the stock. This division is less prone to economic turns, since it relies to a large degree on long-term infrastructure spending by governments.
“During economic downturns, governments invest in infrastructure to provide fiscal stimulus including investments into public transportation,” Kevin Chiang, an analyst at CIBC World Markets, said in a note last week.
Indeed, he pointed out that revenue from Bombardier’s transportation unit – which accounts for more than half of Bombardier’s overall annual sales – actually increased during the Great Recession. Sales rose from US$8-billion in 2008 to US$10-billion in 2009.
Today, its backlog of orders for streetcars, subways and high-speed trains stands at US$34-billion. That is equal to about three years of sales, and supports Mr. Chiang’s estimate that Bombardier will generate about US$1-billion in free cash flow in 2020.
“While Bombardier is a higher-risk investment, the recent selloff fails to recognize our view [that] it is on more solid footing,” Mr. Chiang said.