This Could Send Bombardier Stock Soaring
Bombardier, Inc. (TSX:BBD.B) stock has stagnated somewhat after it broke past CA$2.10 last July. True, it stagnated around the CA$1.96–$1.99 mark, which still represents breaking through a tough price ceiling this week, closing at CA$2.16 per share. But should you have trusted our opinion on Bombardier stock since just about a year ago, you would have felt its 53% year-to-date increase in your wallet.
While some might say Bombardier stock isn’t moving—why bother with it?—there is a case to me made for its stability. But there are more than a few cases to be made about BBD stock’s potential to gain in 2016, and especially in 2017. That said, Bombardier’s second-quarter results, published August 5, were hardly what you’d call stellar.
Analysts Confident in Bombardier’s Future
Bombardier reported an adjusted loss of $0.06 per share. Analysts had expected the loss to be limited to $0.05 cents a share. Still, the loss was due to less demand for business jets. Yet it’s been no secret that—with the exception of the highest end of the market, dominated by Gulfstream or the “tricked up” up versions of regular airliners like the Boeing Co (NYSE:BA) “737” or Airbus “380”—demand for business jets has suffered in recent years. (Source: “Bombardier loses half a billion dollars, orders for new planes in Second Quarter,” CTV, August 5, 2016.)
So, while Bombardier scored some high-profile sales with Air Canada (TSE:AC) and Delta Air Lines, Inc. (NYSE:DAL) for its key “CSeries” product (as far as the performance of BBD.B stock is concerned), it also has to deal with some emerging redundancies. Bombardier’s new CEO, Alain Bellemare, has already started project to rationalize the company.
BBD stock will gain, more due to the additional potential CSeries sales than due to the company’s major diet, marked by the sale of major assets and staff reductions. Especially in its private jet business, the company has focused on reducing staff. Bombardier has managed to cut costs, thereby welcoming better margins than expected for the business aircraft division. Many often forget, moreover, that Bombardier is more than just the sum of its planes: it also makes trains.
Accordingly, BBD.B stock saw a slight pickup over the past week after the company announced a CA$1.7-billion sale of 660 railcars, in a deal that the British House of Commons said was “the biggest investment in the railways since the Victorian era.” (Source: “Bombardier seals $1.7-billion British rail order,” The Globe and Mail, August 10, 2016.)
Moreover, analysts were impressed by how diligently Bombardier used its capital. The better news, especially as far as 2017 is concerned for BBD stock, is that Bombardier will have more opportunities to save cash.
This is because the CSeries has now completed its main development phase, which is always the most expensive. Over the coming quarters, Bombardier can focus more on building revenues than on expenditures to get the program moving. To that end, Bombardier ended the quarter with cash of $4.9 billion, which—despite its $12.0 billion debt—should suffice in financing its activities for the next few years.
No More Foreign Buyers Needed for Bombardier
Bombardier stock remains under pressure, but the strain has started to ease. After all, some urged the company to seek a foreign partner, or a foreign buyer—touted as Airbus at one point—last year. The CSeries suffered delays they said, while conveniently forgetting that no modern airliner has left the assembly line on schedule. The now-highly-praised Boeing “787” was delivered to All-Nippon Airways, the launch customer, about five years late.
Bombardier has decided to devote its full attention to the CSeries because the company remains under pressure. It has received its orders, is now to get more, and must prove its ability to deliver. Bombardier’s decision to terminate the “Learjet 85” business jet’s development last year is probably a step in that direction. This will mean more job cuts and probably more angry suppliers. But the fact of the matter is that airliners are now generating much more revenue, even if the margins are smaller.
Still not wanting to lose its business jet market share, Bombardier will keep the higher-end and higher-demand models such as the “Global 7000” and “Global 8000” on track. Learjet sales dropped since the 2008 sub-prime crisis, while some competitors like Cessna or Embraer have stolen market share away. What goes around comes around.
Embraer has lost market share and contracts to Bombardier with key airlines, including Delta. There is a good chance that Bombardier might sell the legendary Learjet business to aid its determination to compete successfully against the likes of Airbus and Boeing in the mid-size and short-to-mid-range twinjet market. (Source: “Bombardier could mull Learjet sale to help pay debt, analysts say,” The Globe and Mail, August 10, 2016.)
That said, while Bombardier stock is set to grow for the rest of 2016 and 2017, there are other interesting investment prospects in the aerospace and defense business. Consider learning more about the investment case of defense stocks, presented here: “Military’s ‘6th Branch’ to Create 22,000 Millionaires Again?”