Is Bombardier (TSX:BBD.B) Stock a Buy?

Bombardier (TSX:BBD.B) stock has slumped 36% in six months. Is this stock a buy at this dip?

| More on:

Bombardier (TSX:BBD.B) stock has dipped 36% in the bear market. This downturn momentum began in October 2021, as inflation started seeping in from generous fiscal stimulus packages. The correction was expected, as the stock surged 360% between January and September 2021 on the back of strengthening fundamentals. 2021 was the most dramatic year for the plane maker. The keywords to understand are strengthening fundamentals.

The management took some bold moves and turned eight years of losses into a small profit. Is this stock a buy at the current price of $1.4/share? 

Every crisis has pulled the stock down. But, as Warren Buffett says, “If past history was all that is needed to play the game of money, the richest people would be librarians.”

2021: A year that was 

The two biggest burdens for Bombardier were its loss-making businesses and mounting debt. Over the years, the company offloaded its loss-making businesses, including its train business, which it sold to Alstom last year. It has streamlined its focus exclusively on designing, manufacturing, and servicing business jets. It has three business jets: Global, Challenger, and Learjet. 

Bombardier tackled another pressing issue and paid off $3 billion in debt. It made the most of the record-low interest rate and restructured $2.1 billion worth of debt. This reduced its annual interest expense by over $225 million. These efforts freed the company from three years of debt repayment. The next debt repayment of $1 billion comes in 2024. 

Bombardier still has a leverage ratio of a little less than eight times, which means its net debt is eight times its current operating income. The company will continue to deleverage its balance sheet by repaying debt and increasing EBITDA. 

Deleveraging and offloading loss-making businesses increased its 2021 adjusted EBITDA by 220% to $640 million and resulted in a positive free cash flow (FCF) of $100 million. This means the company is no longer losing money. Its next focus is to improve profit and cash flow. 

How 2022-2025 looks for Bombardier 

In its Investor Day presentation, Bombardier has laid out its four-year plan to achieve its revenue, EBITDA, FCF, and debt target for 2025.

The first is revenue target of $7.5 billion by 2025, for which it has to grow its revenue at an average annual rate of 5% between 2022 and 2025. It plans to grow its revenue by selling more business jets and expanding in the aftermarket. Aftermarket includes maintenance, components, servicing, and customer response. Bombardier currently taps the aftermarket of 39% of its operational aircraft. It plans to increase this contribution to 50% by opening new maintenance and service centres worldwide.

The second is the EBITDA target of $1.5 billion (20% EBITDA margin). To reach this level, Bombardier needs to grow EBITDA at an average annual rate of 50%. A majority of the EBITDA improvement is expected to come from reducing the manufacturing cost of Global 7500 aircraft and other costs. 

The third is FCF of over $500 million by 2025 — four times its 2021 FCF. The final target is a net leverage ratio of three times. It will repay another $2.5 billion debt maturing in 2024 and 2025 and use its enhanced credit rating to further reduce interest costs. It will maintain liquidity of $2.1 billion for daily operations and contingency. 

The above financial targets look achievable if the economic and business conditions remain stable or improve. However, the Russia-Ukraine war disrupted the supply chain, increased oil prices, and created fear of a recession. If Bombardier made fighter jets, the stock could have surged triple digits. But it makes business jets, and the war has impacted business spending. Keep a close eye on the stock, as Bombardier stock will likely remain volatile in the short term.

Is Bombardier stock a buy? 

The current stock price is an attractive entry point for value investors. There is a significant improvement in the fundamentals, and no debt maturity till 2023 gives Bombardier the flexibility to withstand the crisis. Bombardier is a turnaround story and can deliver growth in the next five years. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Middle aged man drinks coffee
Dividend Stocks

Is Brookfield Stock a Buy, Sell, or Hold for 2025?

BAM stock recently jumped after beating earnings. But is it still a buy, or is it better to wait?

Read more »

Make a choice, path to success, sign
Dividend Stocks

Is Fortis Stock a Buy for its Dividend Yield?

Fortis has increased the dividend for 51 consecutive years.

Read more »

oil and gas pipeline
Energy Stocks

Is TC Energy Stock a Good Buy?

TC Energy stock has a lot going for it, but there are also a few red flags to consider before…

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Top Canadian Utility Stocks to Buy in November

Are you looking for some top Canadian utility stocks to own? Here's a look at three must-have options for any…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is First Capital REIT a Buy for its 4.8% Yield?

First Capital is a REIT that offers you a tasty dividend yield of 4.8%. Is this TSX dividend stock a…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

TFSA Passive Income: 3 Stocks to Buy and Never Sell

Stocks like Fortis Inc (TSX:FTS) are worth holding long term.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

Canadian Utility Stocks to Buy Now for Stable Returns

Given their regulated business, falling interest rates, and healthy growth prospects, these three Canadian utility stocks are ideal for earning…

Read more »

Investor reading the newspaper
Investing

Is Couche-Tard Stock a Buy, Sell, or Hold for 2025?

Let's dive into whether Alimentation Couche-Tard (TSX:ATD) is a top stock to buy, sell, or hold in the coming year.

Read more »