In April, Bombardier (TSX:BBD.B) stock fell 8.4% from its 52-week high of $74.43. Just nine months back, the company did a 25:1 reverse stock split to keep the stock price above $1 and avoid removal from the TSX Composite Index. Since the June 2022 reverse split, this mid-cap stock has jumped 253%, raising questions over whether the stock is overvalued. After all, who will buy a business jet amid a global recession? Well, that’s the thing, wealthy individuals, governments, companies, and charter plane services buy Bombardier business jets. They are not affected by inflation.
The business jet maker has seen a shift in its client mix. Charter operators like NetJets and Flexjet now account for 20% of its order book, down from 40% earlier. The remaining 80% of orders are from individuals and companies. A recession could slow orders, but Bombardier’s 2023 outlook shows otherwise. And it is this outlook that keeps me bullish on Bombardier.
Bombardier’s bullish 2023 outlook and 2025 targets
Bombardier expects to deliver 138 aircraft in 2023 (123 in 2022) and 150 in 2025. This outlook and the financial target are based on its 2022 order backlog of $14.8 billion, the launch of its Challenger 3500 jet in September 2022, and the pending launch of its flagship Global 8000 aircraft in 2025.
While other companies are slashing their outlook and financial targets, Bombardier has raised its 2025 financial target. Management increased the 2025 revenue target from $7.5 billion to $9 billion and free cash flow target from $500 million to $900 million. Bombardier’s CEO Eric Martel calls this guidance cautious.
He expects stronger demand from China, which he has not incorporated into the 2025 target. If Martel’s expectations materialize, Bombardier could see market-beating earnings. It is always better to underpromise and over-deliver.
Bombardier’s future growth plans
Martel’s priorities are clear: first, make the business solvent, and then focus on growth. He has almost achieved the first target by reducing debt, focusing on the strengths (mid- and large-size private, the Challenger and Global jets), divesting low-margin products like the small cabin Learjet, and expanding aftermarket service. These steps have helped Bombardier reduce costs and increase free cash flow. Now it is time to grow adjusted EBITDA.
Bombardier has repaid all debt maturing up to March 2025 and could repay another $500 million to bring down its long-term debt to under $5.5 billion. Martel has no plans to spend billions of dollars to develop a new aircraft until 2025. Business solvency is still the priority, and challenging macro conditions refrain Bombardier from taking the expensive route. However, he has not ruled out mergers and acquisitions.
Mistakes of the past are learnings of the future
Bombardier was pushed closer to bankruptcy in the last 10 years after its C-series commercial aircraft program went way over budget ($6 billion). It was forced to sell the program to Airbus. Today, the C-series aircraft fly as the A220. It made the costly mistake of challenging Boeing and Airbus in their game. Too many planes spoil profits.
The new Martel-led Bombardier is keeping it simple and streamlined. It spent 2022 building aftermarket facilities worldwide. It now expects these facilities to start churning revenue. In 2023 and beyond, the company will focus on bringing the Global 8000 aircraft into service. At the same time, it is modifying its Challenger and Global business jets for special missions for the defence industry and spending money on reducing carbon emissions.
If an aircraft program is delayed, the company has cash flow flexibility from aftermarket services and no debt maturities.
Is Bombardier stock a buy at its high?
A turnaround stock has significant growth potential if you hold the stock till the company reaches normalized growth. The stock is trading at 16 times its 2025 free cash flow guidance and 1.6 times its 2025 revenue guidance.
BBD stock could fall as recession concerns pull down the discretionary industry creating a buying opportunity. If Bombardier beats its guidance or announces a merger or acquisition, its stock price could grow further. Otherwise, it could continue growing by double digits.
