Bombardier, Inc. (TSX:BBD.B) announced fourth-quarter earnings February 16; they were a mixed bag, leaving investors to wonder if the company’s five-year turnaround plan is now a 15-year plan.
Don’t buy its plan, and certainly don’t buy its stock. Here’s why.
It isn’t enough that the Federal Government is “subsidizing” Bombardier’s plane business to the tune of $372 million, but now it turns out the interest-free loan will be repaid out of royalties from the sale of Global 7000 business jets and CSeries commercial aircraft — over 15 years.
Yes, I know the argument, other countries where planes are manufactured provide financial aid, so there’s nothing wrong with Canada doing the same. Well, America has a far more liberal view of gun use than here in Canada, so does that mean we should, too? I don’t think so.
I recently discussed how Ford took money from the U.S. Federal Government during the 2008 financial crisis to the tune of US$14.9 billion. However, it paid the going rate at the time of 2.3%, and while some of that loan is still outstanding going on eight years, it’s paying interest on it.
Bombardier is paying no interest for essentially the same thing — a handout — and yet it has the nerve to pay it back over 15 years. Royalty agreement, or whatever you want to call it, this is simply another move by a company that simply doesn’t understand the word self-sufficient.
Now back to its Q4 and full-year earnings report.
Bombardier’s top-line revenue declined 12.7% in the fourth quarter to US$4.4 billion, while full-year sales were off by 10% to US$16.3 billion. The commercial aircraft segment provided the only glimmer of hope in 2016 with revenue up 9.3% to US$2.6 billion.
Unfortunately, commercial aircraft represent just 16% of the company’s overall revenue; making things worse, the segment had an EBIT loss before special items of US$427 million — more than double its loss in 2015.
Overall, Bombardier’s 2016 EBIT profit before special items was US$427 million — 22.9% lower than a year earlier, although management had guided between US$350 and $400 million, so it probably considers this a victory of sorts.
Investors shouldn’t.
Companies in money-losing businesses get very good at playing the guidance game, so things always appear headed in the right direction. And they very well may be, but the fact that it will pay out the Fed’s loan over 15 years suggests Bombardier’s turnaround plan isn’t going to happen by 2020, if ever.
The company’s targets for 2020 are US$25 billion in revenue, an EBIT margin of at least 7%, and free cash flow equal to at least 80% of its net income.
As of 2017, its revenue is 34.8% below its target; EBIT margins are 2.6%, 440 basis points below its target, and free cash flow was negative US$1.1 billion — almost US$2 billion short of its US$750 million target.
CEO Alain Bellemare said this about the company’s future in its Q4 2016 earnings press release: “As we begin 2017, we are confident in our strategy, our turnaround plan and in our ability to unleash the full value of the Bombardier portfolio.”
Even if investors take him at his word, the latest Air Canada results show that margins are starting to slip due to higher fuel costs. If the airline industry hits any kind of turbulence between now and 2020, Bombardier’s five-year plan becomes the 10-year plan and ultimately a 15-year plan.
If that happens, taxpayers can kiss the $372 million goodbye.
