Bombardier Inc. (OTCQX: BDRBF) is a global leader in the transportation industry, creating innovative and game-changing planes and trains. The company’ products and services provide world-class transportation experiences that set new standards in passenger comfort, energy efficiency, reliability, and safety.
Headquartered in Montreal, Canada, Bombardier has production and engineering sites in 28 countries across the segments of Transportation, Business Aircraft, Commercial Aircraft and Aerostructures, and Engineering Services. Bombardier shares are traded on the Toronto Stock Exchange (BBD). In the fiscal year ended December 31, 2017, Bombardier posted revenues of $16.2 billion US.
On Nov 8th, the company reported its third quarter 2018 results marked by strong earnings growth.
- Earnings up 48% year over year to $271M on $3.6B revenues
- Free cash flow usage improved by $125M, 25% year over year
- ~$900M net proceeds expected mainly from the sale of non-core assets: Q Series program and Business Aircraft’s flight and technical training activities
- Global 7500 certified by Transport Canada and the FAA; on track for entry into service before year-end
- Enterprise-wide productivity initiatives launched, expected to generate $250M in annual recurring savings by 2021
- 2018 guidance updated: Revenues ~$16.5B; EBIT ~$1B; and free cash flow breakeven ±$150M, including net proceeds from Downsview sale
- 2019 guidance provided: Revenues targeted to grow by ~10%; EBIT targeted to increase by ~20% with improved cash generation
Promising outlook over the near to medium term:
BDRDF continues to undertake several strategic and tactical steps in improving its operational and liquidity profile and with the numerous portfolio announcements during its earning call, Bombardier introduced its guidance for the 2019 fiscal year.
Revenues are targeted to grow by approximately 10% to $18 billion or more, as deliveries of the Global 7500 business jet accelerate. Profitability is anticipated to increase at a faster pace, with EBIT before special items targeted to grow by approximately 20% to a range of $1.15 billion to $1.25 billion, and EBITDA before special items anticipated to increase by approximately 30% to a range of $1.65 billion to $1.8 billion.
Bombardier is targeting to achieve free cash flow generation in the range of $250 million to $500 million, which is anticipated to be offset by the $250 million restructuring charge mentioned above, as well as a $250 million contingency to reflect the working capital volatility as the Company progresses through its intense growth phase at Business Aircraft and Transportation. Accordingly, free cash flow guidance for 2019 is targeting breakeven plus or minus $250 million.
Bombardier is also reaffirming its 2020 financial targets, even after the divestiture of the Q Series program and Business Aircraft’s flight and technical training activities.
Bombardier Turnaround Plan:
Improving Industry sentiments:
From an industry perspective, Since the beginning of 2018, the demand for commercial air travel, measured by revenue passenger kilometres has continued to show robust growth. 2019 is expected to be another year of above-trend growth for the industry, despite the reduced stimulus from lower airfares and a more mixed economic backdrop. Furthermore, the upward trend and volatility in crude oil prices, combined with environmental issues and regulations, should result in continued demand for more aircraft with optimal efficiency.
Analysts tracking the stock see promise in the company and are very excited about the progress Bombardier has made so far. Next year, Bombardier will take another big step forward. The company will grow the top line by 10% as Global 7500 deliveries accelerate. Moreover, profitability will grow at an even faster rate. EBIT will grow by 20%, and EBITDA will grow by 30%.
Furthermore, the company business profile continues to be strengthened by its strong and competent management team, which is focused on consistently executing the roadmap it created for its turnaround plan. Moreover, 2020 is simply the beginning of another phase for Bombardier. The company is expected to continue growing its revenues and earnings, and most importantly, generate sustainable free cash flow.
Target market at a glance:
Industry and economic environment:
- Positive momentum from the end of 2017 has carried through to 2018 and into the third quarter.
- The global economy is expected to grow at a rate of 3.1% in 2018, higher than the growth of 3.0% in 2017.
- The total number of pre-owned aircraft available for sale as a percentage of the total in-service fleet stood at 8.9% as at September 30, 2018, an improvement from 9.2% as at June 30, 2018.
- This level of pre-owned inventory is below the 10-year historical range for the overall market.
- This improvement is even more considerable when focusing on young pre-owned aircraft, for which availability decreased by an even higher factor. Business jet utilization in the U.S. and Europe remained stable compared to the same period last year.
- These fundamental indicators demonstrate that business aviation is striking the right balance between supply and demand on the marketplace. The Business Aviation industry is poised for growth in the long-term due to a better economic outlook combined with the introduction of new aircraft models and technologies. With the industry’s most comprehensive product portfolio, Bombardier Business Aircraft is well positioned.
Revenues: Revenues during the quarter grew 3% year over year organically from Transportation, Business Aircraft, and Aerostructures, while the deconsolidation of the C Series resulted in a reduction of reported revenues. Revenue for the year is expected at approximately $16.5 billion, the lower end of the guidance range.
Profitability during the quarter strong. The company’ best quarterly performance in years. EBIT before special items grew 48% to $271 million. EBIT before special items is expected to reach the top end of the guidance range at approximatively $1.0 billion.
Liquidity and Capital resources: As per management, with year-end cash on hand of approximately $3 billion and with the proceeds of its announced transactions, DBRBF will have set a strong liquidity foundation as it exits the turnaround in 2020.
Progressing towards 2020 goals; introducing 2019 guidance
- 2019 revenues are targeted to grow by approximately 10% to $18 billion or more.
- Profitability is targeted to improve at a faster pace, expanding margins: approximately 30% EBITDA before special items growth to a range of $1.65 to $1.8 billion, and Approximately 20% EBIT before special items growth to $1.15 to $1.25 billion.
- Transitioning to cash generation in 2019 before one-time items: Free cash flow targeted at breakeven plus or minus $250 million.
- Continuing to track to 2020 financial targets even as the company excludes the results of the Q400 and Business Aircraft training businesses.
Key risk factors and potential stock drivers:
- The meaningful outcome and impact of the company’ ongoing turnaround plan would be one of the most significant catalysts for the Company over the near to medium term.
- Bombardier operates in industry segments which present a variety of risk factors and uncertainties. These risks and uncertainties could adversely affect business activities, financial condition, cash flows and results of operations
- Bombardier’ ability to improve revenue and operating margin leading to sustained improvement in liquidity will be crucial for continued high operational efficiency and hence remain a key monitorable and potential stock driver.
- Capital management has been challenging for the company. Also, Bombardier’ businesses are cyclical and highly capital intensive. Therefore, the company’ ability to manage its liquidity/financial flexibility, while improving its operating performance would continue to remain a key stock sensitivity factor.
- Any major liquidity initiative undertaken by the company would also be positive for the company.
- Increased competition from other businesses including new entrants in market segments in which the company operates has eradicated the pricing power available with the company.
- The company face competition from strong competitors, some of which are larger and may have more significant resources in a given business or region, as well as competitors from emerging markets and new entrants, which may have a better cost structure.
- On Friday, November 23rd, 2018, BDRBF closed at $1.7498, on an average volume of 213,364 shares exchanging hands. Market capitalization is $4.147 billion. The current RSI is at 37.30
- In the past 52 weeks, shares of BDRBF have traded as low as $1.21 and as high as $4.26
- At $1.7498, shares of BDRBF are trading below its 50-day moving average (MA) at $2.75 and below its 200-day moving average (MA) at $3.22
- The present support and resistance levels for the stock are at $1.5969 & $1.9959 respectively.