Latest Round of Layoffs Are Bullish for Bombardier Stock, and Here’s Why
Bombardier, Inc. (TSE:BBD.B) is picking up steam. Investors like the company’s determination to become more efficient. This will enable it to accelerate the “CSeries” program and persuade many potential customers to make a move on the new world-class airliner. It’s not all about investments; it’s about cutting costs in less profitable lines of business. That’s why Bombardier stock is entering a new bullish phase.
On Monday, Bombardier stock hit CA$1.84, its highest price in over a month. BBD.B investors must have welcomed the latest round of restructuring.
For many of the company’s employees, it was a sad day, as Bombardier announced that it will cut 7,500 jobs worldwide over the next two years. These cuts come on top of another 7,000 job cuts that were announced last February. The layoffs will apply to all divisions, but the railway unit alone will account for two-thirds of the positions cut.
While many of the job cuts will likely involve early retirements, investors welcomed the move. It signals the company’s willingness to cut costs as part of its recovery plan until 2020. The goal is to boost profitability and competitiveness. Many investors had accused Bombardier of facing excessive operational costs, so the job cuts should not have come as a surprise.
Bombardier will pursue its current layoff plan while also hiring 3,700 new workers to accelerate the CSeries and “Global 7000” business jet program. Moreover, it should come as no surprise that, given the many delays—and related complaints—about the Toronto Transit Commission (TTC) streetcar contract, that cuts and re-hires will affect that side of the business.
The Key Indicator for BBD.B Stock Remains the CSeries
Bombardier stock’s performance will depend largely on the CSeries. In fact, if Bombardier has struggled over the past two years (the share price even dropped to “penny stock” level in early 2016), high costs are to blame. The investment needed to complete the design and development of the CSeries exceeded expectations. But that has been the same with any new program at its rivals Boeing Co (NYSE:BA) and Airbus. The bearish market for mid-level executive jets has done the rest.
More cynical observers might suggest that the job cuts are a way to prompt the Canadian federal government into matching the $1.0 billion investment from the Quebec provincial government. The relevant federal minister, Navdeep Bains, said last week that Ottawa would invest in the company, but that it was necessary to ensure the maintenance of the Canadian head office, research and development activities, and manufacturing jobs related to the CSeries.
As it happens, the CSeries program, even from the employee headcount, should be getting a boost. Investors know that the CSeries’ success is crucial in order to save the jobs of its 71,000 or so employees who remain at Bombardier. That’s why investors should see any action the company takes to improve the new airliner’s commercial success as a bullish move. The announced layoffs should not compromise the investment package. So far, Bombardier has hired 300 people since the start of 2016 to work on the CSeries program.
Layoffs Are Not Good News but, from BBD.B Stock Investors’ View, They Were Needed
Many of us have been there. Losing a job is not pleasant; it’s one of the saddest life experiences. But, from the detached and selfish investment case perspective, any step that makes it easier for Bombardier to achieve its goals for the CSeries is necessary. Therefore, investors should welcome the shift of a larger chunk of the budget to the new plane, away from other divisions.
Some of the job cuts, which might well happen in France, where the company has railway divisions, might help speed up new contracts. The head of Bombardier’s France subsidiary warned that it would be difficult to keep Bombardier’s factories open there, unless new train orders were made “within six to nine months”. (Source: “Bombardier s’impose une nouvelle cure d’amaigrissement,” Les Echos, October 24, 2016.)
This raises the question of whether Bombardier might be reducing its manufacturing capabilities with all these layoffs. In other words, is it shooting itself in the foot, or rather in the landing gear? The short answer is no. Bombardier is targeting administrative and other non-production-related functions. Bombardier must do everything it can to increase the CSeries production rate.
Apart from more potential orders from Icelandair Group hf (ICE:ICEAIR), the recent U.S.- approved multi-billion-dollar contracts for Boeing and Airbus in Iran bode well for Bombardier stock. Canada has already lifted sanctions, allowing Bombardier to propose not only selling planes to Iranian airlines, but also railways. (Source: “Bombardier looks to catch up in Iran: CEO,” Global News, October 13, 2016.)