The market works in its own mysterious ways. A few years back, Bombardier (TSX:BBD.D) seemed to be on the verge of collapse, driven by its huge debt pile. However, fast forward to today, the fears of a decline have long gone, and the stock is a multi-bagger. The stock has returned more than 300% in the last 10-odd months, outperforming broader markets by a big leap.
Bombardier: Strong financial and operational growth fuels the stock
The company seems on a much better footing today. After the pandemic did early damage, the same was a boon for this private jet maker. Bombardier saw robust demand growth in 2020 as people chose private planes amid travel restrictions. It has now attained a growth path with eyes on 2025.
Bombardier operates through two segments, aircraft manufacturing and aftermarket services. The latter accounts for 20% of the company’s top line but has seen superior growth in the last two years. The favourable aircraft mix has played out well, taking its total revenues to $6.9 billion in 2022. It delivered 123 aircraft last year compared to 110 in 2021.
Its gross margin has also improved to 18% last year from its long-term average of 12%. The order backlog reached $14.8 billion at the end of last year, highlighting solid order intake and healthy demand. Free cash flows last year came in at $717 million, which was a significant improvement from negative cash flows in 2021.
Apart from financial growth, its debt reduction has been the main highlighting point recently. Its net debt has dropped from $8.5 billion in 2020 to $5.1 billion in 2022. As the debt declines, the company will save on interest expenses, ultimately improving its profitability.
Although the debt profile has improved, it still has a concerning leverage position with a net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of over eight.
Guidance
For 2025, Bombardier has given a revenue guidance of $9 billion, implying a growth rate of 9%. The company recently increased its guidance considering the demand strength and order backlog. Its adjusted operating profit is expected to reach $1.62 billion by 2025 from $930 million in 2022.
Even though the operating profit shows stellar potential growth, the company has lowered its operating margin by 200 basis points (bps) in its recently released guidance. However, it still shows approximately 500 bps increase in operating margin from its current levels. Thanks to its consistent efforts on the deleveraging front, it forecasts the leverage ratio to fall close to 2.5 times by 2025. A strong balance sheet and stable profitability will likely create a decent shareholder value in the long term.
Growth drivers/dampeners
Bombardier expects strong demand growth to continue in the long term, driven by its backlog environment and a significant rise in high-net-worth individuals. Moreover, the pandemic was a trigger point, which notably enhanced and motivated private jet adoption.
At the same time, inflation and recession worries are some of the chief woes Bombardier is struggling with. Rising costs and a short-term blip in demand due to an economic downturn could dent its margins and derail its growth story.
Conclusion
On a valuation front, Bombardier stock is trading at an enterprise value-to-EBITDA ratio of nine. The stock seems fully priced in its 2025 growth and looks fairly priced.
A $100 price target for it seems a tad hard to achieve this year. Analysts’ consensus has it around $76.6, implying a mere 5% upside potential from here. However, investors can consider this turned-around private jet maker if the dampeners listed above make a disproportionate dent in the stock.
