The business jet maker Bombardier (TSX:BBD.D) has seen solid growth in the last few years, emerging from a brink of a collapse. Bombardier accentuated growth in its recently reported first-quarter (Q1) 2023 earnings. However, the stock itself turned around and displayed a ruthless erosion from its peak. Since April 2023, Bombardier stock has dropped 25%.
Bombardier earnings in Q1 2023
Bombardier reported a decent set of numbers in its Q1 2023 release. Its revenues for the quarter came in at US$1.5 billion — an increase of 17% year over year. Its operating profit also increased by 27% against Q1 2022. The growth came mainly due to higher aircraft deliveries and increased demand for its aftermarket services.
The private jet maker runs through two segments: aircraft manufacturing and aftermarket services. The latter accounts for 20% of the company’s consolidated revenues and has seen steep growth in the last two years.
Despite a decent top line and operating profit surge, investors dumped Bombardier stock in the last few weeks. And that’s mainly because of its negative free cash flows in the quarter. The company reported free cash flow usage of US$247 million in Q1 2023 compared to its free cash flows of US$173 million.
Free cash flow shows the leftover cash with the company after paying its capital and operating expenses. It is cash which can be used for repaying debt, and acquisitions and can also be returned to shareholders via dividends.
Free cash flows and balance sheet improvement
In 2022, Bombardier reported free cash flows of US$717 million and broke the spell of years of negative free cash flows. Thus, its recent free cash usage in Q1 2023 raises questions about its turnaround and long-term profitability.
However, this could be a short-term blip due to higher working capital needs. It seems on track for growth, as the management reiterated its long-term guidance. For 2027, the management aims to see an adjusted operating profit of US$1.625 billion, implying a compound annual growth of 20%.
Apart from an improvement on the profitability front, the company is working to strengthen its balance sheet. It repaid US$400 million of debt in Q1 2023, decreasing its leverage ratio to seven. At the end of Q1 2023, it had a net debt of $4.9 billion, which is substantially down from over US$8.5 billion in Q4 2020.
As the debt goes down, its interest expenses will decrease, eventually boosting its profitability. Note that even if there has been an improvement in the financial position, the company’s debt burden is still high. But considering management’s focus on deleveraging and visible growth in operating profits, the leverage will likely soon be under control.
Risks
The private jet business has a positive correlation with broader economic cycles. If we see a severe economic downturn, it could negatively impact aircraft demand and Bombardier’s financials.
Moreover, the stock still seems overvalued at an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) valuation of 10, even after its recent correction. How its deliveries and free cash flows fare in the next few quarters will be key drivers for its stock. It looks prudent to load up on Bombardier stock in multiple tranches, considering its recent selloff.
