Analysts divided on Bombardier
RBC believes ‘ negative sentiment’ reflected in stock is unwarranted
Bombardier Inc. has put the worst behind it and new orders for the CSeries are about to start rolling in, so the “deep negative sentiment” reflected in the stock price is no longer warranted, according to a new analysis by RBC.
Analyst Walter Spracklin on Wednesday upgraded Bombardier to outperform from sector perform and raised his target price to $ 3.50, about 40 per cent above where the stock is currently trading. It closed Wednesday at $ 2.54 in Toronto.
Bombardier’s shares have lost about 40 per cent of their value so far this year as cost overruns in the CSeries jetliner program raised liquidity concerns and forced the company to make some tough decisions, including replacing its chief executive, suspending its dividend and pausing development of a new Learjet.
RBC’s optimistic outlook puts it in the minority. Bombardier’s stock has six buy ratings, 12 holds and five sells, according to Bloomberg data.
Spracklin gave three reasons for his upgrade of Bombardier.
One is that the company recently completed a $ 2.4 billion capital raise ( although $ 1.1 billion of that was a public equity offering that still needs to be approved by shareholders in a vote scheduled for Friday).
“Following the recent capital raise, Bombardier now has $ 6.2 billion in cash and available credit,” Spracklin said in a note to clients. “Based on our analysis, this suggests that Bombardier now has more than sufficient liquidity to launch the CSeries aircraft.”
Other analysts are less confident about Bombardier’s finances. Macquarie analyst Konark Gupta recently downgraded Bombardier to underperform due to concerns about its cash burn.
“Our expected cash burn in 2015/ 16 along with $ 750 million debt maturity in January 2016 may wash out the entire ... equity/ debt proceeds, causing leverage to rise through 2016 and potentially raising liquidity flags again in 2017,” Gupta said in a note.
Bombardier has invested a tremendous amount in the CSeries, which has been beset with multiple delays and cost overruns. The company said last month that it now expects the program to cost a total of $ 5.4 billion US, about $ 2 billion ahead of its original estimate.
The second reason Spracklin gave was that he believes the risk of further delays and cost overruns is diminishing now that 80 per cent of the “high- risk” testing is done. The aircraft is scheduled to enter into service by the end of this year.
“While certification and/ or entry into service may slip into Q1/ 16, we would consider that immaterial and the real risk that we are monitoring for is a testing issue that would delay the program more than six months,” Spracklin said. “We do not see this as likely and the capital raise serves to further soften this potential risk.”
Spracklin added that Bombardier could absorb a delay of more than 12 months if necessary.
Finally, Bombardier is expected to bring the CSeries to the Paris Air Show in June, which Spracklin believes should lead to “fairly meaningful new order catalysts” that would then help boost the stock price.
In the longer term, the CSeries is expected to contribute 3 cents per share to Bombardier’s earnings in RBC’s base- case scenario, assuming production of 100 planes per year.
“While the next three to five years of the CSeries program will have a significant level of uncertainty ... when we look at the longterm run rate of the program, we believe the market is putting too onerous a discount on the potential base earning power,” Spracklin said.