Alex Cutulenco | October 8, 2015: Bombardier (TSX: BBD.B) shares were hit hard on October 7, 2015, as news broke out about a failed attempt to sell a majority stake in its troubled CSeries jet program to Airbus, a major competitor. Although several of the Company’s 243 aircraft in backlog look vulnerable due to a lack of large buyers, here are some things we still like about Bombardier stock.
Bombardier has risked its future on the CSeries, a newly-designed commercial aircraft competing in the 100-150 seat market. This has presented two major problems: one is demand, since Bombardier needs orders to prove the program is viable, and the other is liquidity, since getting the program running is a drain on cash when cash flow from the rest of the company has disappointed. Demand, however, has been weak for all 100-150 seat aircraft, not just the CSeries, while Boeing and Airbus have sold thousands of larger narrow bodies, which is where airline preferences now seem to reside. Although several of the 243 aircraft in backlog look vulnerable due to a lack of large buyers, here are some things we still like about Bombardier stock:
1. Costs in Canada, Revenues in US$
The Company reported that 33% of its labor force were Canadian employees, while 27% or revenues were derived from the U.S. The Company had just 10% of its workers in the U.S., with the majority being in Europe. This is a significant operational boost, as the USD/CAD exchange rate is providing material profitability.
Figure 1: Revenues, Backlog, and Geographic Segmentation of Labor
Source: Company presentation
2. Large Backlog
The company recorded $69.1 billion worth of backlog as at the end of 2014, with a 55%/45% split between Aerospace and Transportation, respectively.
3. Low Valuation Multiples
Although the company’s current valuation is largely dependent on its future operational prospects, we want to remind investors that forecasting Bombardier’s financial performance is exceptionally difficult right now. The company has a new CEO and is in the midst of a CFO transition, and the new CEO is undertaking a comprehensive review before determining his plans and issuing new guidance. Perhaps most importantly, a key earnings driver for the next several years will be the production ramp of the CSeries, a brand new aircraft with unknown unit costs that will be produced in unknown quantities.
Looking at current trading multiples, the Company is trading at 0.4x LTM Revenues, 8.1x LTM Operating Cash Flow, and 3.6x Book Value. Compare this to aerospace competitor Boeing (NYSE: BA), which is trading at 1.0x LTM Revenues, 10.0x LTM Operating Cash Flow, and 14.6x Book Value.
Alex can be reach at: alex@gravitasfinancial.com
