Bombardier shares rise, but turnaround will take time
After a nice bump on Friday following a second quarter earnings beat, Bombardier Inc. shares are now approaching a 12-month high of $2.75 seen in January.
But after falling below $4 per share in early 2015, and staying well below that level since, investors are keen to see if the Montreal-based transportation and aerospace firm can continue to gain meaningful traction.
The market appears to have confidence in Bombardier’s transformation plan, as its Q2 results provided several data points supporting this thesis. But the turnaround won’t happen overnight.
Margins at Bombardier Transportation rose 190 basis points on an annual basis to 8.9 per cent, while they climbed 220 bps to 8.2 per cent in the Aerospace unit.
The transportation business is experiencing a healthy order flow, and there are clear signs the pace of CSeries deliveries is picking up again.
Steve Hansen at Raymond James pointed out that after a difficult start to the year, there were four CSeries deliveries in Q2, compared to just three in the previous three months. There were two more aircraft delivered in July, and management expects the pace will double to eight in Q3, and again to 16 in Q4.
The analyst noted that Bombardier is on track to hit approximately 30 aircraft in fiscal 2017, although he considers 27 to 28 a more realistic target.
“However, we also believe the directional trend is more important that a precise target,” Hansen said in a research report.
The analyst characterized Bombardier’s transition plan as “hitting full stride,” and he believes that warrants an upgrade to outperform from market perform, along with a price target bump to $3.25 from $2.50 previously.
While it has been more than a year since the last CSeries order, Bombardier is confident more are coming after recent discussions with potential customers at the Paris Air Show.
Benoit Poirier at Desjardins Capital Markets told clients that this confirms growing interest in the aircraft based on positive passenger feedback and the outstanding performance since entry into service.
The analyst noted that management expects to announce a significant improvement in CSeries performance specifications during Q3, as it delivered better-than-expected results in all key areas including fuel burn, range, operating costs and reliability.
“In the meantime, we are encouraged by current discussions and are confident in Bombardier’s ability to secure new orders, and believe that the current share price does not reflect any material orders, which reduces potential downside,” Poirier said.
The improvements and consistency demonstrated by Bombardier’s new management team over the past 18 month, gives the analyst confidence that the 2020 plan will be achieved. However, he acknowledged that there aren’t any near-term catalysts on the horizon, so investors will be to be patient. “…We continue to expect a gradual re-rating in the shares as investors gain confidence in the recovery strategy,” Poirier said in a report.
He believes the success of the CSeries and Global (large cabin, ultra long-range business jets) could drive the stock to $5 by 2020. That would mark a doubling of the current share price.
Investors should also be pleased to hear than Bombardier’s free cash flow usage of US$570 million was slightly lower than consensus expectations. Although capex rose 30 per cent year-over-year, management’s track record of sticking to its capital plan, and consistently meeting or beating FCF estimates for eight consecutive quarters, should not be overlooked.
Poirier pointed out that maintenance capex is expected to be roughly US$500 million per year after the Global 7000 aircraft development, and management reiterated that it has US$1.0 billion of capex unallocated for 2019 and 2020.
That provides Bombardier with some valuable flexibility and options for how it wants to deploy cash going forward.