Turbulence in forecast for Bombardier investors

Stock plummets over 18% after company slashes revenue, earnings expectations

Just as it appeared that Bombardier Inc.’s woes were behind it, shareholders received another gut-punch on Thursday when the stock plunged by more than 18 per cent on the back of an unexpected profit warning.

On Thursday morning, Bombardier cut its 2019 revenue projection by US$1 billion to US$17 billion, while lowering its earnings expectations to between US$1 billion and US$1.5 billion, a drop of 10 per cent.

In a statement, Bombardier president and CEO Alain Bellemare attributed the weaker forecast to aircraft deliveries and issues with its transportation division. “We had a soft first quarter driven by the timing of aircraft deliveries, foreign exchange headwind and a slower production ramp-up at transportation,” Bellemare said. Since Bombardier flirted with bankruptcy in 2016, its attempts at resurgence and restructuring have led to multiple surges for its Class B shares, each one shortlived and followed by an abrupt reversal.

That pattern appeared to change between Oct. 2017 and July 2018 when the stock climbed from the $2 range to more than $5 for the first time in seven years. Under Bellemare, who has championed a five-year plan, the company has focused on reducing costs by selling off multiple aircraft business — including its vaunted C-Series program — and laying off thousands of employees. Along the road to recovery, the federal and Quebec governments combined to pitch in more than $1.3 billion in loans. Even Bellemare’s lofty goal of generating US$750 million to US$1 billion in cash by 2020 seemed achievable. In November, Bombardier’s bright outlook took a negative turn when it announced 5,000 further job cuts, slashed cash-flow estimates and posted poor revenue growth in its third-quarter earnings.

Furthering the woes, the news that Quebec regulators were looking into the company’s executive stock sale program contributed to Bombardier experiencing its worst week on the market since 1988, losing 37 per cent of its value. A recovery again looked possible in February when Bombardier’s Class B shares jumped 42 per cent to over $2.80 and remained range bound near that level before suffering its latest collapse on Thursday.

Much of Bombardier’s woes was due to issues with its transportation unit, which is responsible for rail projects and has drawn the ire of public transit organizations in Toronto and New York. The division continues to hold significant importance to Bombardier as it is still its main driver of revenue despite its troubles. The company cut its transportation revenue expectations by US$750 million to US$8.75 billion, a loss that Bellemare attributed to changes “to production ramp up and cost pressure from a few challenging legacy projects.” The profit warning was a “negative surprise to the market,” CITI Research analyst Stephen Trent wrote in a note.

Trent worried that transportation division issues may continue to weigh on the stock. “Although the company’s transport segment has been relatively stable in recent years, it would be unreasonable to dismiss the possibility of addition volatility from this segment, especially considering f/x trends,” Trent said. Trent, who cut his target price to $3.40 from $4, is still optimistic about the company, however, saying that Bombardier’s restructuring has led to concerns about its margin improvement fading. BMO analyst Fadi Chamoun also lowered his price target on Bombardier to $4.25 from $5, warning that “there are no assurances that we are out of the woods completely” with the company’s legacy transportation contracts. Uncertainty aside, Chamoun believes there could be some stability ahead in the transportation unit because the legacy contracts are in their later stages and the backlog quality has improved.

But there are still other risks associated with the stock, Trent wrote, highlighting the potential for European transportation infrastructure budgets to be disappoint in the event of a hard-Brexit and a weaker cycle for long-term business jets.

“If the impact on the company from any of these factors proves to be greater/less than we anticipate, we believe the stock will likely have difficulty achieving our target price,” he wrote.

We had a soft first quarter driven by the timing of aircraft deliveries ... a slower production ramp-up at transportation.