The stock price of business jet maker Bombardier (TSX:BBD.B) has surged 37% after it fell on February 8 as shareholders overreacted to its 2023 free cash flow missing analyst expectations. The business jet maker has everything right going for it. I have been bullish on this stock since 2022 as it turned around its multi-year losses into profits. The company also has a long-term roadmap to grow its revenue and profits while dealing with debt.
Achieved financial flexibility in the last three years
During the 2021-2023 period, Bombardier focused on deleveraging the balance sheet and turning profitable.
Bombardier reduced its long-term debt by approximately US$4.5 billion, which improved its credit rating. It is using its improved credit ratings to refinance debt at a lower interest rate. An interest rate cut by the Bank of Canada will help Bombardier reduce its interest expense by US$250 million by 2025 from US$330 million at the end of 2020. It has no debt maturities till June 2026 and is also refinancing its US$2.8 billion debt with 2026-2027 maturities.
To achieve profitability, Bombardier offloaded all other assets and only focused on its profit-making arm – business jets. It completed its cost reduction plan and expanded its after-market service to cater to the business jets it sold.
All these efforts helped the company report its first annual profit in many years of US$490 million in 2023. This turnaround sent Bombardier stock up 343% between 2021 and 2023.
How does the next 3 years look for Bombardier’s stock price?
From 2024-2026, Bombardier will focus on enhancing efficiency to deliver stronger financial performance. It will use every opportunity to repay and refinance debt and reduce its net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio to ~2 to 2.5 times. It sees strong demand for business jets, expecting to deliver 150 to 155 aircraft in 2024 (from 138 in 2023).
Bombardier is set to bring into service the Global 8000, the upgrade of its flagship aircraft Global 7500 (of which it sold 150 jets), by 2025. This new jet could boost its order book, which currently stands at US$14.2 billion.
Moreover, the company is also tapping the Defense sector to sell its Challenger and Global aircraft. It has even received its first order from the US Army and aims to generate $1 billion in revenue from the Defense sector.
In the after-market service segment, Bombardier is looking to tap the Certified Pre-owned aircraft market and provide original equipment manufacturer products.
While Bombardier is making efforts at the company level, the macroeconomic recovery could add to the equation. This year will probably be slow as interest rates continue to remain high. However, a recovery is likely in 2025 and beyond, which could boost business jet ownership and flying hours, bringing more business for Bombardier.
A rebound could help Bombardier stock grow in the strong double digits in the next three years.
How does the next 5 and 10 years look for Bombardier’s stock price?
In the long term, Bombardier expects strong economic growth to boost demand beyond developed countries into developing countries. New business jet ownership models, such as fractional and charter, could make business jets accessible to a broader customer base, driving demand for business jets and after-market services. Moreover, new business jet models will replace older ones, creating demand in the long term.
Bombardier is also working on an EcoJet research project at present. If it succeeds, it could start offering it in the long term. An environment-friendly business jet could revolutionize the aviation space.
Investor takeaway
Bombardier is in a long-term growth trend, making it a stock to buy and hold. There might be some volatility in the short term amid economic uncertainty, creating an opportunity for value investors to buy more shares of Bombardier.
