Shares of Bombardier (TSX:BBD.B), the business jet maker that experienced a remarkable turnover after a management change, have been losing altitude since April 1. In these eight months, the stock has fallen more than 34% after reaching a peak of over $73.
Is Bombardier stock a good buy today as it trades below $50?
The bull case for Bombardier
Bombardier has risen like a phoenix from the ashes since management changed hands in 2020. The new leaders’ first target was to reduce debt and free up two years of debt maturity, giving the company the flexibility to invest in the business. It has successfully achieved this target and has repaid all debt maturities until 2025 (The company plans to repay its $1.3 billion debt maturing in 2026 over the next two years.). The reduction in debt has strengthened Bombardier’s balance sheet, which is a welcome development during the current high-interest rate environment.
The company has a strong order book of $14.7 billion. It has delivered 82 aircraft this year and is on track to deliver 138 aircraft by the end of the year. That means the company expects to deliver 56 aircraft in the fourth quarter, seven more than the same quarter a year earlier. This hints that better fourth-quarter earnings are on the horizon in February 2024.
Bombardier’s rising free cash flows and reduced liquidity are another reason to like the stock today. Lower debt reduces the interest rate burden and frees up the company from having to maintain high liquidity as a security for creditors. It aims to reduce its 2025 liquidity requirement to a range of $1 billion–1.5 billion (down from the $2.1 billion requirement in 2021). The reinvestment of cash could speed up Bombardier’s expansion.
Given Bombardier’s strong balance sheet, rising free cash flow, and increasing revenue, its stock is likely to rise when the market wakes up and realizes its value.
The bear case for Bombardier
So why has the stock fallen? Overall, market bearishness has pulled down the price. If you look at another plane maker, Boeing’s, stock price saw a V-shaped recovery, falling almost 25% between August and October and then rallying 31% in 40 days as the market recovered on expectations that the rate hike is over.
Similarly, I think Bombardier has the potential to rally 30–40% (to as high as $70) within a few months if the economic recovery begins. The current weakness in the stock is because of the decade-high interest rate of 5% that has stressed commercial activities. Another stressor is fear of a recession next year in America and Canada, as China and Germany are already facing weak economic situations.
If a recession does occur, Bombardier’s strategy of having 18–24 months with no debt maturity will help sustain the company during weak business conditions. And even if aircraft deliveries slow in a recession, Bombardier can still rake in cash from aftermarket services of its aircraft.
Is this stock a buy today?
In my opinion, the bull case of the company’s fundamentals outweighs the bear case of the overall market, making Bombardier a buy at a price below $50. The stock could fall another 20–25% if a recession is triggered. It’d be a buy even at that dip, as the company’s strong fundamentals increase the chances of a recovery in the next three years.
